Castler Escrow

Why is P2P Lending Raging?

What is peer-to-peer lending?

P2P lending is a loan given out by one party to another party – be it a business or an individual. The loan accumulates interest till the borrower pays the amount back to the lender. The process is similar to that of a standard loan, except a few key features:

1. Dedicated P2P Marketplace

Lenders and borrowers looking for p2p solutions connect on special “marketplaces”. These are online sites where a particular borrower can find the perfect lender for him/her/themselves. The ideal lender would be someone who befits the borrowers repayment conditions, such as matching interest rates, duration, conditions for calculating interest etc.

2. Higher Interest Rates

P2P lenders give out loans at higher rates than loans given by banks and NBFCs. This adds to the risk factor of non-repayability. This means that he borrower may not be able to return the principal + interest amount. Naturally, this also means a higher risk of losses to the lender.

3. Regulating Nature

Since both borrowers and lenders are able to connect and discuss the interest rates and the possibilities of default, negotiations are rampant. This helps in regulating the p2p lending marketplace, and the rates are constantly regulating.

How does P2P lending work?

Peer-to-peer lending can be a lot of things – flexible, rigid, customisable, you name it. A wide variety of lending and borrowing options are available, and the feature of “choice” makes it attractive. The following steps are involved in setting yourself up for the process-

Step 1: Open Your Account

Choose a p2p lender of your liking and open an account with them by debiting a small token amount into the lender’s account.

Step 2: Set a Rate

You can choose to either set an interest rate that suits you (as a lender), or select a rate specified by the lending agent.

Step 3: Lend

Naturally, the final step is to lend an amount for a fixed period of time. Sometimes, there may be a fee involved for giving out a loan as well.
The P2P business model, in essence, is a bidding-based model. Digital P2P platforms are often NBFCs with a tech architecture. This means that digital P2P services fall in the gamut of the “fintech” industry. Generally, an auction is conducted by a lender agent that aggregates the loan amount contributed by different parties (which can include businesses and individuals alike). After this, the borrower(s) receives a bid offer, which s/he/they may accept or reject.

P2P Lending Through Escrows

When lenders and borrowers use escrow accounts for P2P lending, they receive twin benefits. Firstly, escrow accounts protect parties from probable litigation problems. And secondly, escrow also helps in securely parking the loan funds till the bidding/ lending round is complete.
An escrow account is an agreement-based third-party account set up with a neutral and unbiased escrow company. The account is created to serve the needs specified and agreed by all parties, which is why it is a preferred mode for secure P2P lending. Through this, lenders and borrowers are able to protect their interests fully and transparently.
Traditionally, setting up an escrow account with a bank has been a tedious process involving high costs, high turnaround time, and a bucketload of documentation. Nowadays, however, instant digital escrow accounts can be created for P2P lending. These accounts are faster, more economical, and offer a netbanking-like smart dashboard facility to borrowers and lenders to track their fund flows in real-time. For added security, they partner with licensed banks and certified trusteeship companies that approve each fund flow and ensure transparency.*

P2P Lending Escrow Process*

Step 1

The borrower and lender agent (collectively referred to as “parties”) get eKYC’d by the escrow company.

Step 2

The parties agree to a set of terms that protect their interests and define the conditions for the escrow transaction.

Step 3

The digital escrow account is opened instantly, and login credentials to the smart dashboard are provided to the parties according to the agreed terms.

Step 4

The lender agent shares the escrow account details with different lenders using the P2P service to lend to a particular borrower at a particular rate. The total loan amount is collected in the escrow account before disbursal.

Step 5

Once the collection is complete, the loan is disbursed to the borrower. Along a similar process, the interest payable on the loan is also routed through the escrow account.
After the disbursal and collection is complete, the escrow account is closed according to the terms and conditions agreed upon by the parties.

Benefits of Using Escrow

For lenders, the perks of using digital escrow for P2P lending are many, and range from greater security and transparency to relatively higher convenience.
With digital escrows, lenders can open different accounts for different borrowers instantly and economically, and can track fund flows from each account on the same dashboard. Of course, a separate escrow agreement will have to be signed by the lender with each borrower s/he/they open an account with. The lender can give out account info to numerous borrowers and park the disbursal amount in escrow conveniently. Any transfer mode such as RTGS, NEFT, netbanking, and cheque can be used by the lenders to deposit funds in escrow. In addition to that, the interest collected from the borrowers can be collected in full in escrow and then individually routed to different lenders.*
Borrowers are protected from litigation problems if they use escrows for collecting the loan amount. When taking a P2P loan, the amount will reflect as “income” if it hits the current a/c of the borrower directly. However, a loan is not income. To avoid justifications to auditors, using a third-party account like an escrow account can help.
*All information provided in this section pertains to Castler only. The processes of any other digital escrow provider can be radically different.

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