P2P Lending: Definition and How It Works

Admin BFI
15 March 2024
P2P Lending: Definition and How It Works

With advancing technology becoming an integral part of our lives, it inevitably brings about lifestyle changes among communities. Peer-to-peer (P2P) lending is one such advancement in the financial sector. P2P lending is a way to earn passive income, which is currently gaining popularity. It is a form of funding that has surged and is favored by millennials.


So, what exactly is P2P Lending? Let's delve into its definition and how it works.


1. What is P2P Lending?

Before delving deeper into P2P lending, one must understand its definition. Essentially, P2P lending is one of the fintech methods highly favored by many people nowadays.


1.1 P2P Lending is...

P2P lending is the process of collecting funds through a platform or fintech company to be provided as loans to business owners. Another definition of P2P lending is an online loan platform where all transactions are conducted between borrowers and lenders. Therefore, the function of P2P lending is to connect fund providers or investors with fund borrowers online. The businesses eligible for such funding can range from small to large-scale enterprises.


1.2 The Difference Between P2P Lending and Online Loans (Pinjol)

After understanding the definition of P2P lending, it's evident that P2P lending differs from online loans or "Pinjol." Here are the distinctions between Pinjol and P2P lending based on several factors:


1. Loan Duration

In Pinjol, loans are typically personal and cater to individuals facing urgent financial needs without savings. On the other hand, P2P lending serves as collective financing, with loans primarily directed towards businesses as working capital.


2. Types of Loans

The most significant difference between Pinjol and P2P Lending lies in the interest rates offered by each company. Pinjol typically offers daily interest rates starting from 0.8% per day or approximately 292% per year. In contrast, P2P lending, as a fintech platform, offers relatively lower interest rates ranging from 12% to 30% per year.


The lower interest rates in P2P lending are attributed to its collective financing nature, which follows the interest rates of banks and other financial institutions. As a result, P2P lending does not profit from interest rates, as they all go to the fund providers.


3. Source of Loan Funds

Pinjol's loan funds come from personal money, while P2P lending operates as a collective financing fintech platform that sources funds from various channels, including investors looking to expand their funds.


4. Risk Level

There is no in-depth analysis of borrower data in the online loan application process. In other words, Pinjol companies may not fully understand the actual capabilities of borrowers, leading to risks of late payments or defaults. Late payments in Pinjol often incur fines, and debt collection involves contacting all the borrower's contacts, indicating a less stringent security measure.


In contrast, P2P lending requires credit scoring, making the lending process more meticulous. Any risks of default in P2P lending are borne by the fund providers according to OJK regulations. Consequently, P2P lending is considered more secure, prioritizing collective financing interests.


2. Benefits of P2P Lending

P2P lending offers numerous benefits, especially for Micro, Small, and Medium Enterprises (MSMEs) seeking to establish and expand their businesses. Here are some benefits of P2P lending, particularly for businesses:


2.1 Easy and Fast Loan Access

Fundamentally, P2P lending platforms offer an easy and fast loan process. P2P lending requires fewer stringent requirements compared to traditional lending institutions like conventional banks.


2.2 Access to Business Loan Funds

Business capital is crucial for business growth, especially for MSMEs. P2P lending provides them with an advantage by offering opportunities to obtain business funding, aside from conventional financial institutions.


2.3 Registered and Supervised by OJK

Security, for both loan recipients and fund providers, is a significant advantage of P2P lending. Most P2P lending platforms are proven to be secure, as they are monitored by the Financial Services Authority (OJK), offering similar protection to formal financial institutions.


Under OJK Regulation Number 77/POJK.01/2016 concerning Information Technology-Based Lending and Borrowing, P2P lending is formally regulated and supervised by OJK. This regulation encompasses operational guidelines for P2P lending, including business activity regulations, risk management, reporting, registration and licensing processes, and information technology system governance.


3. Risks of P2P Lending

Despite its diverse benefits and promised advantages, P2P lending also entails risks. Therefore, it's suitable for individuals who enjoy challenges and have an aggressive risk profile. The risks associated with P2P lending include:


3.1 Inability to Withdraw Funds Mid-Period

As a fund provider, it's impossible to withdraw or access funds midway through the investment period. This means that all investments made can only be withdrawn after a specified period ends.


Additionally, each P2P lending company has its own policy regarding fund disbursement procedures. Generally, investment tenors vary, ranging from three months, six months, one year, or even longer.


3.2 Default Payment Risks

Every type of investment carries its own set of risks. The potential for profit correlates with the likelihood of losses. The risk of default payments should be a serious concern for prospective investors, even though there may be compensation through penalty payments from borrowers.


Default payment risks remain a burden on investors, even if there are guarantees of fund returns from fintech lending companies. However, compensation amounts usually don't reach 100%. Therefore, investors must be prepared to face any potential losses.


3.3 Misappropriation of Investment Funds

The most significant risk in P2P lending is the possibility of misappropriation of investment funds. Without careful selection of reputable companies with official registration under the Financial Services Authority (OJK), there's a risk that the company may mismanage client funds.


As a result, funds invested for a long period may disappear due to company bankruptcy or mismanagement by irresponsible individuals.


Despite the risks, P2P lending remains a promising investment option, especially with the increasing activities involving P2P lending fintech.


4. How P2P Lending Works

If you've decided on P2P lending as a business tool, you need to understand how it works:


4.1 For Fund Providers (Lenders):

1. Market Research

Lenders analyze various loan options based on available information.

2. Providing Funds for Loan Offers

Lenders determine the amount of funds to be provided for selected loan offers.

3. Receiving Loan Repayments

Lenders receive loan repayments along with interest, which can then be reinvested in other loan offers.


4.2 For Borrowers:

1. Loan Application

Borrowers complete required information in the loan application form.

2. Analysis and Approval Process

The P2P lending team analyzes and approves loan applications before presenting them to lenders.

3. Loan Repayment

Borrowers make loan repayments according to the schedule set through the chosen P2P lending platform.


Dear BFI's friends, the above is a brief explanation of P2P lending. Ensure you weigh the pros and cons before choosing this financing option. If you're interested, make sure to use P2P lending platforms registered and supervised by OJK.


An example of a P2P lending platform in Indonesia with OJK approval is "Pinjam Modal," established since 2017 and continuously advancing. "Pinjam Modal" is a subsidiary of BFI Finance, one of the independent multifinance companies founded in 1982. BFI Finance provides multi-purpose loans secured by motor vehicle ownership certificates, car ownership certificates, and house or shop certificates for various needs. Apply for financing at BFI Finance for a quick and easy process.

Shariah Financing

Purchase sharia used and multi-purpose cars with the No Fines and No Penalties feature See Terms

Home Certificate

Low interest rates start from 0.6% per month and long loan tenors up until 7 years. See Terms

BPKB Motor

Get a loan with a fast process and a maximum tenor of up to 24 months. See Terms


Get a disbursement fund of up to 85% of the vehicle value and a tenor of up to 4 years. See Terms

Kategori : Pinjaman