What Is a Lending Circle and How Does It work?
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What is an Lending Circle and How Does It Work?
A lending circle loan can be an interest-free option to borrow money and create credit.
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Last updated on Nov 8, 2022
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An lending circle a centuries-old idea in which a group of people, usually close friends or family members, set aside a particular amount of money and then give the money to a single member of the group. These are commonplace in different cultures across the world and known as susus, tandas or hui, based on where you go.
This type of lending and borrowing is popular because the money is not a source of interest and it helps participants pay for unexpected or other planned expenses. Nowadays those who participate in lending circles are able to build credit.
What exactly is a lending circle? work?
Lending circles help participants raise money for various expenses, such as down payments or debts, as well as small-business investments.
The group members collectively decide about the loan amount, say $1000. Each member contributes a part of that amount, say $100 each, to the fund pool every month, and one member receives the entire $1,000 every time.
Informal lending circles have a consensus on an order of payouts and can alter in the event that one member needs to access the money.
At the end of the 10th month, the participants will each have $1,000. The loan is free of charge and has no or very low interest, depending on the group’s arrangement.
It is an extremely social pressure to repay the loan effectively, as the lending circles are typically comprised of those you are familiar with and trust.
How a lending circle helps to build credit
Companies such as the nonprofit Mission Asset Fund help participants form lending circles — and increase their credit scores.
A credit score grants you access to financial products , such as loans as well as credit card, and a higher score can result in better interest rates.
There are no specific requirements to participate in a lending circle except showing that you have an income source and a manageable level of credit, claims Jose Quinonez, Mission Asset Fund’s founder and CEO.
Alternatives to the lending circle
Because they’re interest-free, lending circles are among the most affordable ways to borrow money. Compare them with other options for credit building and borrowing.
Other ways to increase credit
. Secured cards require a deposit that’s usually equivalent to your credit line. The card issuer keeps the deposit in case you don’t pay the bill, and then reports the payments to credit bureaus each time you use the card , and pay it off. You get the deposit back after you close the account. It is not necessary to have a good credit score to obtain a secured credit card.
. A credit-building loan lets you save money while you build credit. The lender holds the amount you want to borrow while you make payments. The lender reports the payment to the credit bureaus and releases the cash after you’ve paid off the loan. Community banks and credit unions offer these, but and both offer them on the internet.
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Alternative ways to earn cash
. Local nonprofits, charities , and religious organizations can help you obtain food, clothing and transportation. If you’re struggling to cover living expenses, ask your landlord, utility company or mortgage provider to delay payments, or contact an organization for help in the long run.
. Get a low- or free loan from a trusted person. The lender and you can create a repayment plan which includes the amount of payments and how the loan will be used. Combining relationships and money can be risky, so ensure that each party is comfortable with the agreement.
Paycheck advance. Ask your employer for earlier access to your pay, or use a to draw money from your future earnings. The loan apps might charge tiny fees. Cashing in advance means that you won’t receive the full amount when payday rolls around, so be sure to make sure to check your budget so that you won’t miss the payment on your bills.
. It is possible to earn money through from selling clothes, doing freelance work, or even driving for a rideshare service. Although there’s no need to be interested however, this may need the luxury of time.
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Nerdy Tip
An lending group that can help you establish credit is a cheaper and safer method to borrow cash than relying on payday lenders. Payday loans have high rates of interest, are due in a short period of time, and permit rolling over of the loan, all of which can lead to the loop of financial debt. A lending circle allows you to take out loans at no or extremely low cost, usually from your neighbors in your community.
Authors’ Bios Amrita Jayakumar used to write at NerdWallet. She was previously employed by The Washington Post and the Miami Herald.
Annie Millerbernd works as a personal loans writer. Her writing has been featured in The Associated Press and USA Today.
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