Peer-to-peer (P2P) platforms offer personal loans at really affordable interest rates from a group of individual lenders without going through the hassle of an intermediary, such as banks.

The lending method, however, involves more risk and effort than borrowing from a bank. Individuals who like to avail loans, where they are not charged with higher interest rates or will face hurdles in availing loans from banks due to poor credit history, go for peer-to-peer lending.

On P2P platforms, there are no fixed rates for unsecured loans and may vary from borrower to borrower based on their ability to repay the loan and his credit profile.

Interest rate is majorly machine-driven and human interference is restricted only to financial document verifications of the borrower.

This is where risk profiling becomes very important in P2P lending. A borrower with low risk will get loans at a lower interest rate, while a person with a higher risk attached to its profile has to pay higher rates for his loan.

As like banks, P2P lending platforms also assess your risk and associate the interest rates to it. Before disbursing a loan, the investor looks at your credit history, repayment behaviour, past loans and its ability to make payments on time.

“Markers like income, sources of income, dependants and earning members show the financial ability. Some fintech companies are also experimenting to incorporate shopping details to determine financial behaviour and intentions,” says Rajat Gandhi, CEO, Faircent told the Economic Times.

Like banks, fintech companies rely heavily on data analytics to determine a borrower’s repayment capabilities and financial behaviour which determines the interest rate at which a person will be given loans.

Interest rates on peer-to-peer lending also differ according to the demographics and geography, with people living in remote areas having to pay higher interest on their loans than somebody living in a city with better financial exposure.

The underwriting team does the credit evaluation of the borrower and makes the final offer. The borrower is only listed on the platform after he accepts the offer, Nikhil Prabhakar, co-founder, RupeeCircle said to ET.

Mostly, the average rate of interest on investment on a P2P platform is in the range of 12 percent to 36 percent. According to i2ifunding.com, a category A borrower may face the least risk while a category F borrower faces the highest risk.

Following interest rates are paid by borrowers across categories:

A category borrower - 12.00 percent to 14.99 percent

B category borrower - 15.00 percent to 17.49 percent

C category borrower - 17.50 percent to 19.99 percent

D category borrower - 20.00 percent to 22.49 percent

E category borrower - 22.50 percent to 24.99 percent

F category borrower - 25.00 percent to 36.00 percent