What is an Lending Circle and How Does It Function?
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What Is a Lending Circle and How Does It work?
A lending circle loan could be a non-interest option to borrow money and increase credit.
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Updated on November 8, 2022.
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An lending circle an ancient idea wherein an entire group of people, usually close friends or family members, set aside a particular amount of money and then give it to one member of the group. They’re customary in cultures around the world and known as tandas, susus , or Hui, depending on the location you’re in.
This method of lending and borrowing is popular since the funds is interest-free and can help members pay for emergencies or anticipated expenses. These days those who participate in lending circles are able to build credit.
What is a lending circle and how does it function?
Lending circles help participants raise money for various expenses, including down payment, debts and small-business investments.
The members of the group collectively decide what loan amount, for example, $1,000. Then each member contributes part of the amount, for example $100 per person in the fund pool each month. Then, one member receives the entire $1,000 every time.
Informal lending circles agree to the order of payments and can alter when one of the members has an urgent need for the funds.
In the 10th month the participants will each have $1,000. The loan has no charges and no or very low rate of interest, based on the agreement of the group.
There is a strong social pressure to pay back the loan successfully because lending circles often consist of people you know and trust.
How a lending circle helps in building credit
Companies such as the nonprofit Mission Asset Fund help participants to form lending circles and build their credit scores.
Credit scores give you access to financial products , such as loans or credit cards and a higher credit score means better interest rates.
There are no specific prerequisites to be a part of the lending circle, other than that you have income and have a reasonable level of credit, says Jose Quinonez, Mission Asset Fund’s CEO and founder.
Lending circle alternatives
Because they’re not a source of interest, lending circles are one of the cheapest methods of borrowing money. Compare them with other options for credit building and borrowing.
Other ways to increase credit
. Security-based cards need a security deposit which is typically the amount of your credit line. The issuer holds the money in the event that you fail to pay the bill, and then reports the payments to credit bureaus each time you use the card and pay it off. The deposit will be returned after you close the account. You don’t need good credit to obtain a secured credit card.
. A credit-building loan forces you to reduce your expenses while you build credit. The lender keeps the amount you’d like to borrow until you’ve made payments. The lender then reports the repayments to credit bureaus and releases the cash after you’ve paid off the loan. Credit unions and community banks provide these services, however, and both of them offer them online.
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Alternative ways to earn cash
. Local nonprofits, charities , and religious groups can assist you to find food, clothing, and transportation. If you’re struggling to cover living expenses, ask your landlord, utility company or mortgage issuer to defer payments, or ask a for long-term help.
. Take advantage of a low-, or free loan from someone you trust. The lender and you can create a repayment plan that includes payment amounts as well as how the loan will be utilized. Combining relationships and money could be risky, so ensure that both parties are happy with the arrangement.
Paycheck advance. Ask your employer for early access to your paycheck, or use a to borrow from your future earnings. The loan apps might charge tiny fees. Cashing early will mean you don’t receive the full amount on payday, so check your budget to ensure you won’t miss any bill payments.
. You can earn money by selling clothes, freelancing or driving for a rideshare company. Though there’s no interest involved it is possible to require the luxury of time.
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Nerdy Tip
A lending circle that assists you establish credit is a less expensive and more secure method of borrowing money than turning to payday lenders. Payday loans have high rates of interest they are due in short time, and allow for rollovers of the loan that could trap you in a loop of financial debt. A lending circle lets you take out loans at no or very low cost, typically from people in your own community.
Authors’ Bios Amrita Jayakumar is a former writer for NerdWallet. She was previously employed by The Washington Post and the Miami Herald.
Annie Millerbernd is a personal loans writer. Her work has appeared on The Associated Press and USA Today.
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