If you’re an adventurous investor, you’ve probably already considered peer-to-peer (P2P) lending platforms. Popular platforms like LendingClub, Prosper, and many others have made personal lending easier than ever.But what if you could combine anonymous P2P lending with specific knowledge about a borrower? Would you be more willing to spot an actual friend or a stranger $500 (with an interest rate)? Lenme, a new P2P lending app is helping investors connect their investing with their social life using social media. Should you start investing through Lenme? We’ll explain how it works, and the risks that investors take.Note: Lenme was previously called Lenmo. The name changed occurred in early 2020.
To start using Lenme, you’ll simply download the app from the App Store or the Google Play store. Then, you can fill out your profile and start browsing loan requests.Loan requests include information about the borrower including the loan amount and payment period they’re seeking. Lenme also gives each borrower a credit risk score. The credit risk score is either blue (friend or family member using your Facebook profile), green (strong credit background), orange (moderate risk), or red (high risk). Borrowers can request loans up to $5,000.When you see a loan that makes sense, you can offer an interest rate and payback period. You have to fund the entire loan to be an investor. The loan requester can choose to accept or decline your loan offer. If they accept, you’ll fund the loan using ACH payment processor, Dwolla.Lenme facilitates the loan transaction including collecting payments (and late fees of $10 if necessary) and pursuing collections efforts or reporting delinquent payments to the credit bureaus. All payments to you will be processed through Dwolla.
Lenme doesn’t charge investors fees. Instead, it charges borrowers a 1% origination fee. They take out this fee from the funds investors provide when funding the loan.It always sounds good when you can reduce investment fees, but with P2P lending the low fees could represent a high risk. In all likelihood, Lenme’s loan collections efforts will be minimal, so you may be stuck with a lot of delinquent borrowers or loans in default.
With all P2P lending platforms, investors take on a huge risk. Funding personal or business loans is a high-risk enterprise. Banks send lots of money evaluating the credit profiles of potential borrowers before offering interest rates and terms to them. Taking on those tasks yourself can lead to losing a lot of money.To reduce the risk of losing money, you may want to start by funding several smaller loans with varying risk profiles. That way you can have a portfolio of loans to consider. As the loans are repaid, you can evaluate how the loans performed, so you can inform future decision-making.You could also reduce your risk by only lending to friends and family. If your younger brother needs a few thousand dollars to repair his car, you could lend it to him through Lenme. Not only will you enjoy the benefit of an interest rate and having someone else take care of the payment processing, you can get on his case if he doesn’t make a payment on time.
Using Lenme to lend to family and friends makes a lot of sense. If you’re going to lend to them anyhow, you may as well use a low-cost platform that makes collecting the loan easier (and more official). However, Lenme forces you to figure out what interest rate and repayment terms make sense for the borrower in question. I think the average investor will end up offering too many low-interest loans, and the default rates on the loans will lead to lost money.Of course, time will tell whether this prediction holds true. Perhaps Lenme will make continuous improvements to make loan offers more sensible. At this time though, investors who want to use P2P as a part of their portfolio should stick to some of the platforms that are more established until Lenme has more information to help investors succeed.