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by Leonore Block
Published: February 27, 2023 (4 weeks ago)

What is the Definition of a Lending Circle and How Does It Function?

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What Is the Definition of a Lending Circle and How Does It Function?
An lending circle loan could be a non-interest way to borrow money and create credit.


Updated on November 8, 2022

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The concept of a lending circle a centuries-old idea wherein groups of people, mostly family members or friends, frequently put aside a certain amount of money and give it to a person in the group. They’re customary in cultures around the world , and are also known as susus, tandas or hui, depending on the place you’re going.
This kind of borrowing and lending is popular since the funds is not a source of interest and it helps participants pay for unexpected or anticipated expenses. These days the lending circle members are able to build credit.
What is a lending circle and how does it function?
Lending circles assist participants in raising funds to cover various expenses like down payments, debts and 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 amount, for example $100 apiece for the fund pool every month, and one member receives the entire $1,000 every month.
Informal lending circles are able to agree on an arrangement of payment that can be changed in the event that one member has an urgent need for the funds.
By the 10th month, the participants will each have the sum of $1,000. The loan is free of charge and no or very low interest, depending on the group’s arrangement.
There is a strong social motivation to repay the loan efficiently because lending circles typically 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 create lending circles and build their credit scores.
Credit scores give you the ability to access financial products such as loans and credit cards, and a better credit score can result in lower interest rates.
There aren’t any specific conditions to join a lending circle except showing that you have income and a manageable amount of debt, says Jose Quinonez, Mission Asset Fund’s founder and CEO.
Options for lending circles
Because they’re not a source of interest They’re among the most affordable methods of borrowing money. Compare them with other options for credit building and borrowing.
Other methods to build credit
. Credit cards that are secured require deposit that’s usually equivalent to your credit line. The card issuer keeps the deposit in the event that you fail to pay the balance, and also reports your payments to credit bureaus as you use the card , and make the payment. The deposit will be returned when you have closed the account. It is not necessary to have a good credit score to get a secured credit card.
. A credit-building loan allows you to reduce your expenses while building credit. The lender holds the amount you’d like to borrow, while you make payments. The lender reports the payments to the credit bureaus and then releases the funds after you’ve paid off the loan. Credit unions and community banks offer these, but and both of them offer these online.

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Alternative ways to earn cash
. Local nonprofits, charities and religious associations can help you get food, clothing and transportation. If you’re struggling to pay for living expenses, ask your utility company, landlord or mortgage issuer to defer payments, or ask a for long-term help.

. Take advantage of a low-, or free loan from a person you trust. The lender and you can make a repayment schedule that includes payment amounts as well as how the money will be utilized. Mixing money and relationships can be risky, so make sure that both parties are happy with the arrangement.
Paycheck advance. Ask your employer for an early release of your paycheck, or use a to take a loan from future earnings. Loan apps may charge tiny fees. Cashing in early means you won’t receive your full pay when payday rolls around, so be sure to check your budget to ensure you won’t miss any payments to your bill.
. You can earn money by from selling clothes, doing freelance work, or even driving for a rideshare service. Although there’s no need to be interested it is possible to require time and effort.

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Nerdy Tip
An lending group that assists you establish credit is a cheaper and safer method to borrow cash than relying on payday lenders. Payday loans are characterized by high interest rates they are due in a short period of time, and permit to rollover the loan, all of which can trap you in the loop of financial debt. A lending circle allows you to get money for free or at extremely low cost, usually from people in your own community.

Authors’ Bios Amrita Jayakumar used to write for NerdWallet. She was previously employed by The Washington Post and the Miami Herald.

Annie Millerbernd, a private loans writer. Her work has been published in The Associated Press and USA Today.

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