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If someone asks me to loan them money, I usually run quickly in the other direction. After all, the last thing I want is to end up the subject of a “Moneyologist” column.
That was until this week, when my friend Curtis asked me for $50 for lunch money. Curtis asked for the money through Ledge, a new app that claims to “remove the awkwardness of asking friends for money.” The app is aimed at people needing micro loans-from $50 to $5,000 for things like moving costs, pursuing a passion project, or starting a business.
Or lunch. (Disclaimer: Curtis can afford his own sushi. He initiated the request as a way to test the app.)
Peer-to-peer lending is a growing industry, as borrowers seek ways to bypass banks and avoid credit card debt, and as more startups emerge, seeking to disrupt traditional financial processes.
Ledge makes peer-to-peer lending more “millennial” by turning the process of getting a loan into a social engagement. Ledge is designed to work like a crowdfunding campaign, but funders are supposed to get their money back with interest — crowdloaning. Borrowers set their own interest rate and payback period, and post their loan “campaign” to Twitter, Facebook and other social networks. Money doesn’t exchange hands until the loan is fully funded.
Data show there could be a ount of debt millennials carry is $26,485, including student loans but excluding mortgages, according to Experian data, and they have the lowest credit score of all generations.
What’s in it for the lenders? Ledge claims that automated payments through PayPal-owned mobile payments app Venmo PYPL, -2.48% make it easy for borrowers to repay the loan, and lenders can make some money while also helping out a friend.
“When you lend some money out to a friend, you can take on more risk for a higher reward,” said Mark Ranta, head of Digital Banking Solutions at ACI Worldwide ACIW, +1.38% , which makes payment processing systems used in banks and retailers.
“The idea of peer-to-peer lending is a great idea when you’re talking small increments,” he continued. “It’s unlikely you would go to a bank to get a $500 loan. The hassle of that – I don’t know if the bank would even do it.”
And there’s the potential problem: Ledge doesn’t offer any real guarantee I will get my $42 back. “Ledge is not a party to your agreement, and we don’t currently engage in collections or formal credit reporting,” according to the company’s website.
Whether the loan is a legally enforceable agreement – i.e., you can sue if you don’t get your money back – appears to vary by state, according to Ledge’s website. Ledge didn’t return requests for comment.
“Anytime you don’t protect the consumer, that’s where you can see the benefit of a bank,” Ranta said. “The [banks are] the ones taking on the risk. so if they lose that investment, it’s on them, not you.”
It’s a risk: I could make $4.20 off this transaction, or I could lose $42 and our friendship if Curtis takes my money and runs.
Ledge raised $900,000 in seed funding in late September, according to CrunchBase. That sounds like small beans, but the peer-to-peer lending sector is attracting plenty of investment. Kabbage, which allows people to fund small businesses, closed a $50 million funding round led by SoftBank Capital in May, bringing the total equity raised by Kabbage to $106 million.
Prosper erica’s first peer-to-peer lending marketplace, and functions more like a bank than Ledge. Prosper does not allow lenders to contact borrowers, and Prosper ensures all collection activity is performed by licensed agencies.
In April, Prosper announced $165 million in new financing, valuing the company at $1.7 billion and landing it in the “unicorn” club of startups valued at more than $1 billion. Prosper takes a cut of each loan via closing and servicing fees, plus it levies failed and late payment fees and a collection agency fee.
Ledge, on the other hand, isn’t making a dime off my transaction with Curtis. Currently, Ledge users don’t pay any fees. Ledge CEO Adam Neff said in a post on ProductHunt that it intends to eventually provide paid financial services, such as credit building services.
Ranta said he doesn’t suspect Ledge will encourage loans greater than a few hundred dollars purely because of the risk. But he said the app does have potential among the fresh-into-adulthood crowd, who might need $1,000 to pay rent but could pay it back when their next paycheck arrives.
“If you split that out to 20 people and each person gives $50, that’s less of a risk,” he said.