If you need funds at short notice, you have likely wondered which type of loan or credit would be the best for you — a personal loan or a peer-to-peer loan? These two credit instruments vary in their disbursal processes, interest rates, loan amounts, EMI structure and eligibility criteria. Therefore, you should get a fair idea of all the parameters before deciding which one to go with.
An unsecured (no collateral) non-banking financial company (NBFC) personal loan is better than a peer-to-peer loan.
Additional Read: How to Choose the Right Personal Loan Lender
Here are the reasons why you should choose a personal loan over a peer-to-peer loan:
Application process
- Personal loan
You can easily apply for an NBFC personal loan from the website or app of the financial institution. Once you fit the personal loan eligibility criteria — such as minimum and maximum age, minimum monthly income slab, and a credit score of 750 — and submit the necessary documents, you are good to go. The documentation may seem tedious, but this is as good as it gets. Proper documents are required to determine the actual financial capability of the borrower and help them get a loan amount that they can easily repay.
- Peer-to-peer loan
On the other hand, peer-to-peer lending or peer-to-peer personal loans are purely trust-based. These involve asking for a loan from individual investors online. The investors listed on a peer-to-peer lending app are verified, and they grant loans as a means of diversifying their investment portfolio and earning interest. Thus, there is no certainty about how much time it may take a borrower to find a suitable lender.
Approval timeframe
- Personal loan
NBFC personal loan are approved quite fast, usually within 24 hours*. This is a big advantage for borrowers who are in immediate need of money and who cannot afford to wait for long. Some ideal use cases for a personal loan are medical emergencies and education-related needs where funds are required almost instantly.
- Peer-to-peer loan
Getting yourself listed on a peer-to-peer lending app is easy, but the same cannot be said for the rest of the process. Firstly, you will have to pay a listing fee of around Rs. 500. Then, you may have to wait for days or even weeks to find a lender interested in loaning you the funds. Getting a peer-to-peer loan approved is not as straightforward as gaining approval for a personal loan.
Lender interference
- Personal loan
Since NBFC personal loans are designed for individual needs, borrowers are not bound by any preconditions that force them to spend the sum of money in a certain way. This gives you the freedom to allocate and use the funds in a way you deem fit.
- Peer-to-peer loan
Your freedom to spend the funds in peer-to-peer personal loans varies from lender to lender. Since most private lenders are investors, they may put preconditions on borrowers regarding specific use cases for the loan amount.
Processing fees and interest rates
- Personal loan
NBFC personal loan processing fees range from 2% to 2.5% (plus taxes). The personal loan interest rate depends mainly on the loan amount and your credit history. Most financial institutions levy an interest rate starting at 13%. You can also use a personal loan EMI calculator to know your EMIs and interest payable beforehand.
- Peer-to-peer loan
Peer-to-peer personal loans come with relatively higher interest rates and processing fees. The processing fees vary from 2% to as high as 6% (plus taxes). The interest rates on peer-to-peer lending start from a minimum of 16% and go up to a whopping 28%. High-interest rates are why most small borrowers prefer personal loans over peer-to-peer loans.
Summary: Personal loans are excellent financial products for all customers due to their low processing fees, affordable interest rates, flexible tenor, and the freedom to spend the loan amount the way you want. While a peer-to-peer loan is also an option for small borrowers, it comes at relatively higher interest rates and the potential for interference from a private lender or investor. This is why most people prefer a personal loan over a peer-to-peer loan these days.
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