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Formal lending circles may be able to help you build credit with a low- or no-cost loan. The organizations that create and run lending circles bring together people looking to contribute to the circle and collect a payment when it's their turn. Along with potentially building your credit, participating in a lending circle means you'll be sharing resources with other members and helping each other save money.
What Is a Lending Circle?
Lending circles aren't a new idea. Groups of family, friends and community members around the world form rotating savings and lending circles that go by many names, including tandas, cundinas, susu, hui and paluwagan.
The basic premise is that every member of a group contributes to a shared pot of money, and one member receives the entire sum. The circle continues until everyone receives their payout. Most lending circles charge low or no fees or interest.
For example, you could join a lending circle with 12 people where everyone contributes $100 each month. For the next 12 months, each person puts in $100, and one person a month receives $1,200. The order of distribution may be determined when the lending circle first forms.
Will All Lending Circles Help You Build Credit?
Lending circles rely on community participation and informal arrangements, or formal commitments through organizations. But even if everyone makes their payments on time, a lending circle won't help participants build credit unless the loan and payments get reported to the credit bureaus.
Some organizations that run lending circle programs have created official loan documents and established credit reporting systems. Participation in one of these lending circles may be able to help your credit.
For example, Mission Asset Fund (MAF), a nonprofit organization that helps facilitate lending circles, reports its lending circle loans to all three major bureaus—Experian, TransUnion and Equifax. It also partners with organizations across the country to help form and run lending circles.
Circles organized by MAF generally consist of six to 12 participants and last six to 12 months, respectively, with monthly payments ranging from $50 to $200. Once the lending circle begins, MAF will report the installment loan and its details, along with your payments, to the credit bureaus.
MAF doesn't charge interest or fees to participate in a lending circle. And you may qualify regardless of your credit history or score. However, the organization may consider your debt-to-income ratio (DTI) to ensure you'll be able to afford the payments. It might recommend other options, such as working with a financial counselor, if a lending circle doesn't seem workable right now.
There's also a lending circle option through the Esusu Savings app. Using the app, you may be able to create an Esusu savings group and invite participants. Esusu may report the payments to the credit bureaus if the circle lasts at least six months. It charges a $10 fee per each payment cycle, which is evenly split among participants.
How to Find a Lending Circle
If you're interested in joining or starting a lending circle that can help build your credit, MAF has a directory you can search based on your ZIP code. You might work directly with MAF, or form a group through a local partner organization. In either case, you'll see MAF as the lender in your credit reports. The lending circle payments are also guaranteed, so you'll receive your full payout even if a member of your circle misses a payment.
You can download the Esusu Savings iOS or Android app to create an account and start a savings group. While Esusu helps facilitate the transfer of funds and credit reporting, the group leaders are responsible for setting the group's terms, inviting people to participate and encouraging participants to make their contributions on time.
How Do Lending Circle Loans Affect Your Credit?
A lending circle can impact your credit in the same way as other installment loans. The benefit is that the programs often don't have credit score requirements or charge interest, and there may be low or no fees.
Assuming the loan is reported to a credit bureau, a lending circle installment loan can help your credit by:
- Letting you build positive payment history if you make the payments on time
- Adding to your credit mix
- Establishing a new tradeline in your credit report
If you've already established credit, opening a new loan may lower the average age of your accounts, which might hurt your score. You can ask if the lending circle provider requires a credit check (many don't), as a hard inquiry could hurt your scores a little as well.
Missing your payments could hurt your credit when the late payment gets reported. And past-due accounts could be sent to collections, which will also cause a credit score drop.
If you think you may have trouble affording a payment, reach out to the lending circle coordinator immediately. Some may be able to work with you to find an alternative payment plan that's affordable and won't lead to missing a payment.
Alternatives to Lending Circle Loans
Many loans and credit cards can also help you establish or build credit. When researching options, make sure the loans and cards you're considering report payments to the credit bureaus. If you're just getting started or rebuilding your credit, you could look into:
- Secured credit cards: Secured credit cards work like regular credit cards, but the issuer requires a refundable security deposit in case the cardholder stops making their payments. You can get the deposit back after closing your account if it's in good standing. Some cards may refund the deposit as a statement credit and let you upgrade to an unsecured version after you've used the card responsibly.
- Credit-builder loans: A credit-builder loan is an installment loan that lets you build savings and credit. When you take out a credit-builder loan, the loan proceeds are typically set aside in a savings account. Your loan payments get reported to the credit bureaus, and you'll receive the set-aside funds once you pay off the loan.
If you're looking for a loan because you want to borrow money (and not just build credit), an unsecured personal loan could be an option. Some lenders work with borrowers who have fair credit. Repaying the loans on time can help you improve your credit.
It's generally best to avoid other options that don't require a credit check, such as payday loans. In addition to being much more expensive than other options, payday loans don't get reported to the credit bureaus—meaning they won't help your credit even if you repay the loan on time.
Monitor Your Credit
You can watch your progress by signing up for free credit monitoring from Experian. It can sometimes take a few months for new accounts to show up. Once you've established credit, you can also use the free Experian Boost®ø tool to add other regular bills to your Experian credit report, such as bills for phone, utilities and popular streaming services.