What Is an Lending Circle and How Does It work?

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What Is a Lending Circle and How Does It Function?
A lending circle loan could be a non-interest way to borrow money and build credit.


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Updated on November 8, 2022

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The concept of a lending circle a centuries-old idea wherein a group of people, mostly close friends or family members, put aside a certain amount of money, and distribute it to one person in the group. It is a common practice in all cultures of the globe and are referred to as susus, tandas or Hui, depending on where you go.
This type of borrowing and lending is popular because the money is interest-free and can help the members cover unexpected costs or planned expenses. These days the lending circle members may even develop credit.
What is a lending circle and how does it work?
Lending circles help participants raise funds for various expenses, including down payment or debts, as well as small-business investments.
The group members collectively decide about the loan amount, which could be, for instance, $1,000. Then each member contributes part of the loan, say $100 each in the pool of funds every month, and one member gets the full $1,000 every month.
Informal lending circles agree to an arrangement of payment that can be changed when one of the members is in urgent need of the funds.
At the end of the 10th month, everyone will have received the sum of $1,000. The loan carries no fees and there is no or very little rate of interest, based on the agreement of the group.
The social pressure to repay the loan successfully because lending circles typically consist of those you are familiar with and trust.
How a lending circle helps build credit
Companies like the non-profit Mission Asset Fund help participants create lending circles and increase their credit scores.
A credit score grants you access to financial products like loans as well as credit card, and a better credit score means better interest rates.
There aren't any specific requirements to participate in a lending circle other than that you have income and have a reasonable level of credit, claims Jose Quinonez, Mission Asset Fund's CEO and founder.
Lending circle alternatives
Since they don't charge interest They're among the most affordable methods to borrow money. Compare them to other options for credit building and borrowing.
Other methods to increase credit
. Credit cards that are secured require deposit that's usually equivalent to your credit line. The issuer holds the deposit in case you don't pay the balance, and reports payments to the credit bureaus when you use the card and make the payment. The deposit is returned after you've closed the account. It is not necessary to have a good credit score to be able to secure a credit card.
. A credit-building loan allows you to save money while you build credit. The lender keeps the amount you wish to borrow, while you make payments. The lender reports the payment to credit bureaus and releases the money after you've paid back the loan. Community banks and credit unions offer these, but and both of them offer them online.

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Other methods to make cash
. Local charities, nonprofits and religious associations can help you obtain food, clothing and transportation. If you're struggling with living expenses, ask your utility provider, landlord or mortgage provider to delay a payment, or reach out to a for long-term help.

. Take advantage of a low-, or free loan from a trusted person. The lender and you can draw up a repayment plan which includes the amount of payments and how the money will be used. Combining relationships and money can be risky, so make sure that both parties are comfortable with the agreement.
Paycheck advance. Request your employer to grant early access to your paycheck, or use a to draw money from your future earnings. Loan apps may charge tiny fees. Cashing in early means you won't receive the full amount at the time of payday, so make sure you check your budget to ensure you won't miss the payment on your bills.
. You can earn money by making money by selling clothing, freelance work or driving for a rideshare service. Though there's no interest involved, this option may require some time.

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Nerdy Tip
The lending circles that helps you establish credit is a less expensive and safer method to borrow cash than relying on payday lenders. Payday loans carry high interest rates and are due within short time and allow to rollover the loan, all of which can lead to an endless cycle of debt. In contrast, a lending circle lets you get money for free or at extremely low cost, usually from people in your own community.




About the authors: Amrita Jayakumar was a writer for NerdWallet. She previously worked at The Washington Post and the Miami Herald.


Annie Millerbernd is a personal loans writer. Her writing has been featured in The Associated Press and USA Today.







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