In line with the development of the digital economy in which Indonesia is slowly moving towards the largest ecosystem in Southeast Asia, people are increasingly familiar with various transaction options and services, one of which is in applying for loans or financing. Ordinary people who used to often rely on friends or family or even banks to borrow money, are now beginning to turn to alternative financial or technology technologies such as peer-to-peer (P2P) lending. The reason is of course because the process is easier and faster. But apparently, there are still many people who do not really understand the concept of P2P lending and equate it with payday loans.
Although often considered similar because it is short-term, P2P lending with payday loan has a business model that is completely different. More broadly, the tekfin lending industry in the country also consists of various forms and segments. Some focus on consumer bailouts with a nominal value of less than $ 3 million with a loan term of less than 1 week, some are only serving loans for Micro, Small and Medium Enterprises (MSME) capital of up to $ 2 billion with loan terms of 1-12 month. P2P lending itself works according to the second type where it affects the characteristics of the product and its risk mitigation approach. By definition, P2P lending is a service that connects people who want to apply for loans with people who are willing to provide loans through an online platform called the marketplace.
The difference between P2P lending and payday loan lies in many things. Anything?
P2P lending offers relatively low interest ranging from 5% – 30% per year, while payday loans offer daily interest starting at 1% or reaching 300% per year. In determining loan interest, P2P lending always refers to the interest rates of banks or other financial institutions by emphasizing the accessibility points and the speed of the process as well as the supply and demand in which lenders take a look at market conditions. This is because P2P lending does not take advantage of interest costs – all of which belong to lenders. In practice, unbankable people such as MSMEs often have difficulty applying for loans from banks or other financial institutions because they are asked to submit collateral. With P2P lending, their desire to get a loan can finally be facilitated through a safe, easy and fast process.
Loan tenures on P2P lending can vary depending on the wishes of the borrower, but on average about 6 months with a minimum general tenor of 30 days, while payday loans must be paid at one time – not through installments – and there are additional costs if the borrower is late in paying.
Through P2P lending, the borrower only needs to pay the interest that has been set until the loan is paid in full, while through payday loans, the borrower is allowed to extend the term of the loan but must pay additional fees. This is where lenders get the most profit.
Risk assessment to reduce the number of non-performing loans
P2P lending strongly considers the financial condition of the borrower. In the process, P2P lending service providers will conduct a credit analysis to determine the overall risk of the borrower. While payday loans do not consider the financial condition of the borrower. The ability to repay loans is often neglected as long as the submission fulfills the conditions for having a payslip document. In terms of profitability, P2P lending deducts administrative costs from borrowers, not interest costs as is done by payday loans. The advantage is then used by P2P lending for risk mitigation activities so that it continues to provide benefits both to P2P lending service providers, borrowers, and lenders.
All information needed by the borrower or lender is provided in full on the website of each P2P lending service provider, not only related to the product and how it works but also an explanation of the calculation of interest, risk, and owner’s profile so that the public can observe directly. All registered borrowers and lenders will also be provided with a dashboard to monitor the ongoing loan funding process on the site. And if explored further, P2P lending tends to present diverse products to meet every line of community needs, especially those that are productive. While payday loans only present a single product, fast loans that are commonly used to meet consumer needs.
From the beginning, the concept of P2P lending was presented by its players with the aim to bridge the gap of financial access, especially to facilitate financing for the development of MSME businesses. This is in line with the financial inclusion program that has been launched by the government. By offering easy and fast lending and borrowing procedures and processes by considering careful risk-based selection, P2P lending is widely used by those who do not have access to banking such as creative industries, freelance or part-time workers, farm laborers, fishermen, and etcetera. That is why Tekfin has enormous potential to help realize financial inclusion in accordance with the National Inclusive Financial Strategy (SNKI), with the priority of the national agenda being to open access to financial services to at least 75% of Indonesia ‘