P2P lending in India 2025: What is P2P lending? How does it work, and is it legal in India?

Your friend borrows ₹10,000 from you, promising to repay within two months. When the time comes, you find yourself in an awkward position—you can't ask him directly for the money since he is a dear friend. So, you start dropping hints about needing cash urgently, hoping he understands your situation and repays you on time. Frustrated with the whole experience, you begin to think it was a mistake. Now, imagine replacing your friend with a verified borrower and verbal promises with a proper agreement. The repayment lands directly in your account, complete with added interest, in instalments—much like EMIs. This time, instead of paying EMIs, you are receiving them. That's exactly what peer-to-peer (P2P) lending is all about. In this blog, we will explain all the nitty-gritty details of peer-to-peer lending: what it is, how it works, the risks to be aware of, and how you can use it to earn a healthy return.

What is peer-to-peer or P2P lending?

As the name suggests, peer-to-peer lending involves individuals lending directly to other individuals without a bank acting as an intermediary. Think of it as an online marketplace that connects borrowers in need of funds with lenders looking to grow their wealth. P2P lending is emerging as an alternative to traditional debt options, often offering potentially better returns compared to other debt instruments. Additionally, it creates opportunities for borrowers who may struggle to secure a quick loan at a reasonable interest rate.

What are P2P lending platforms?

P2P lending platforms serve as online marketplaces that connect lenders with borrowers. Each platform sets its own rates and terms. Typically, they charge a fee to facilitate the connection between borrowers and lenders—around 2-3% of the loan amount for lenders, while borrowers may face a higher processing fee of 6-8%, which will be adjusted against the loan amount.

How P2P lending works

In India, the P2P lending process typically works like this: A lender opens an account on the P2P platform and funds loans for borrowers. Lenders can view the financial profiles and creditworthiness of each borrower. P2P lending platforms do the basic assessments, providing a score based on the borrower's repayment ability. Lenders have the option to select borrowers and decide how much money they would like to lend. Loans are usually divided into smaller chunks, allowing lenders to fund portions of multiple borrowers' loans. As a lender, you will receive details about the borrower, including their basic profile details (with their consent), the amount they need, the desired interest rate, and their credit score.

Once the lender finalises a borrower, their role is largely complete.

Then the P2P platform facilitates an agreement between the lender and borrower. A key fact statement will be issued to the lender, detailing the Annual Percentage Rate (APR), which includes the total cost of borrowing for the borrower, as well as the recovery mechanism and contact information for the grievance redressal officer. Each month, the lender will receive interest on the amount lent.

For borrowers, the process is similar to that of getting a bank loan. They enter their details, and the platform assesses their creditworthiness to determine how much they can borrow and the applicable interest rate. Borrowers are required to repay the loan in equated monthly installments (EMIs), which include both principal and interest.

What is the maximum limit for P2P lending in India?

To ensure that these loans remain manageable, the Reserve Bank of India (RBI) has established specific limits. The total amount one can lend across all P2P platforms combined cannot exceed ₹50 lakh. If your lending exceeds ₹10 lakh, you will need to obtain a certificate from a Chartered Accountant verifying that your net worth is at least ₹50 lakh.

For borrowers, the total amount borrowed across all P2P platforms cannot exceed ₹10 lakh. Additionally, a single lender's exposure to the same borrower, across all P2P platforms, is capped at ₹50,000. The maximum tenure for these loans is 36 months (or three years), while the minimum tenure varies depending on the P2P lending platform.

Is P2P lending legal in India?

Yes, peer-to-peer (P2P) lending is legal in India and is regulated by the Reserve Bank of India (RBI).

According to RBI’s Master Direction-Non-Banking Financial Company–Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 (updated as of February 27, 2025), here are the key rules you need to know about P2P lending in India:

a) Only RBI-registered NBFC–P2P companies are permitted to operate these platforms.

b) All transactions are processed through RBI-monitored escrow accounts, ensuring that the platform does not have direct access to the funds.

c) Platforms must provide borrower details, such as credit scores, income ranges, and the purpose of the loans, to ensure transparency.

d) NBFC–P2P platforms cannot guarantee any returns of principal protection to any lender. 

f) The P2P platform cannot promote P2P lending as an investment product with features like tenure linked assured minimum returns, liquidity options, etc.

g) Cash transactions are prohibited.Investment alternatives in India

h) Platforms are not allowed to cross-sell any products or services, such as insurance policies or credit guarantees, to either lenders or borrowers.

However, keep in mind that while the RBI’s stringent rules help regulate the framework, they do not completely eliminate risks associated with P2P lending.

What are the risks of P2P lending in India?

As a lender or borrower, it's essential to understand the risks associated with P2P lending before joining the bandwagon. 

P2P lending risks for lenders 

1) As a lender, the most crucial point to grasp is the potential for a permanent loss of your capital in the event of a borrower defaulting. Even if the P2P lending platform claims it will cover your losses in such cases, it's important to note that this practice is not permitted under RBI guidelines.

2) Keep in mind that many borrowers in this space are individuals who have been unable to secure loans from banks or NBFCs, which often indicates weaker credit ratings. 

3) Moreover, your funds are locked in until the borrower repays. 

4) If you concentrate your investments heavily on just a few borrowers, a single default could result in a total loss of your funds.

P2P lending risks for borrowers

1) Delayed or missed repayment will lower your credit score.

2) Consistent default can trigger legal notices and recovery processes.

Note: The P2P lending platforms do attempt to recover the money through professionally trained agents. However, they are prohibited from doing any form of harassment to you. 

Conclusion

In conclusion, P2P lending platforms provide a flexible alternative to traditional fixed-income options. For lenders, it can be a savvy way to earn regular returns, but it's crucial to understand how the system works and the associated risks before investing. Do your homework, examine the finer details, and consider all aspects before proceeding. If approached carefully, P2P lending can yield a consistent income that often surpasses the fixed deposits, liquid funds, bonds, etc offered by banks and other financial institutions.