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As a personal finance writer, I read and write about lending and credit almost every day. My interest in credit stems from a desire to help others save money, and to understand complex systems. Last year, I joined a lending circle and took out a loan to better understand the process and see how it would impact my credit. Here's what I learned.
What Is a Lending Circle?
Many cultures use lending circles as a means of saving and borrowing money. They have different names around the world and the details can vary, but the basic concept is the same.
A group forms and each member equally contributes to a pot or fund on a regular basis (for example, every month). One person gets the entire pot each period, and the recipient changes each time until everyone has had a turn receiving the money in the fund.
Formalized lending circles can help consumers build credit, access no- or low-cost financing and help other borrowers save money.
My Lending Circle Loan Organizer
I first became aware of lending circles as a credit-building tool when I learned about Mission Asset Fund's lending circle program.
Mission Asset Fund (MAF) is a nonprofit based in San Francisco that started offering lending circles in 2008. Its credit-building program formalizes the traditional lending circle with loan agreements. MAF collects payments, distributes funds and reports to the credit bureaus. In addition to its lending circles, MAF offers 0% interest credit-building loans to small business owners and for immigration-related application fees.
You can find lending circles from a few other organizations, and some of them might help your credit. I chose to participate in MAF's program partially because I've recommended the program and wanted to personally experience the process. But also because:
- There are no fees to apply, get the loan or participate.
- It's a 0% interest loan.
- Applying won't impact your credit because there's no hard credit check.
- MAF reports to the three major credit bureaus: Experian, TransUnion and Equifax.
In short, it can be a free way to build your credit.
What It's Like to Apply for and Join a Lending Circle
The MAF lending circle program was created to help underserved and unbanked populations build credit, savings and financial knowledge. But it's open to anyone who has a Social Security number (SSN) or an Individual Taxpayer Identification Number (ITIN).
Here's what the process was like for me.
1. Find a Lending Circle
I used the MAF directory to find a local lending circle provider.
I had several provider options and chose to go with MAF directly as they're local to where I live. MAF also partners with organizations across the country to help them create and run lending circles. (Behind the scenes, MAF is still the one reporting your payments to the credit bureaus.)
If you don't see any options based on your ZIP code, you might not be able to get a lending circle loan through MAF or one of its partners at this time.
2. Submit the Application
Next, I used the online form to submit my name and email address, confirmed my email and filled out an application. You may need to share the following with your application:
- Your SSN or ITIN
- A copy of a valid government-issued identification
- Proof that you own a checking account, such as a voided check or bank statement
- Proof of income, such as two consecutive pay stubs, three consecutive bank statements or a benefits letter
An MAF client success manager reached out to me the day after I submitted my application. She asked me to confirm that I was applying for a lending circle loan (versus a different program) and whether I wanted to participate in a lending circle with a $100 or $200 monthly contribution; I chose the latter.
About a week later, she followed up because there was a slight hiccup: My bank statement didn't have my name, routing number and account number on it. I emailed her a copy of a direct deposit form from my bank account, which satisfied the requirement.
3. Take a Survey
I was also asked to complete a survey. It asked questions related to my personal and financial life, such as the number of people in my household, my income sources, whether I have an emergency fund, the types of insurance I have and my savings goals.
Speaking with MAF representatives, I learned that MAF primarily uses this information to better understand its program participants. There's no income or credit requirement to participate in a lending circle. But if your debt-to-income ratio (DTI) is high and you might struggle to afford the lending circle payments, MAF may suggest other options, such as working with a financial counselor.
4. Complete Financial Education Modules
I was also required to complete at least five financial training modules, which MAF estimates takes about 1.5 hours. There were over 30 modules to choose from, with topics ranging from small business essentials to financial caregiving.
5. Wait for Final Approval
Once I completed the survey and education modules, I reached out to the MAF client success manager to update her on my progress. After a few days, she responded to tell me that everything looked good and she submitted my application for final approval.
6. Meet Your Lending Circle Participants
After getting approved, I was asked to join a lending circle formation session—the next session was about two and a half weeks later. These used to happen in person, but since the pandemic, they're all virtual.
The Zoom call was led by MAF employees who shared a little about the organization, lending circles and the details for our group. All 12 lending circle members were also asked to introduce themselves. Everything was presented in English and Spanish, and translation was available for participants as needed.
Lending circles may be available with payments ranging from $50 to $200 a month, and six to 12 participants. We confirmed that for our lending circle:
- There were 12 people.
- We'd all contribute $200 monthly and each person would get a turn receiving the $2,400.
- The loan had a 12-month repayment term.
The initial order for the distributions was chosen at random, but we were allowed to trade places.
It appeared that several participants were primarily participating to build credit and were happy to give up their spots to people who had more immediate needs. For example, one woman swapped to an earlier position after sharing that she wanted to receive the money before her daughter's upcoming wedding.
The call wrapped up after the payout order and loan details were confirmed.
7. Repaying the Loan
MAF sent me the promissory note that evening and I signed it electronically. I also set up automatic payments, although there was an option to pay by check.
An MAF representative says that nearly all participants repay their lending circle loans in full. However, if someone in your circle falls behind, MAF will step in to make sure you receive the full disbursement amount.
How the Lending Circle Impacted My Credit
I was interested to see how the lending circle loan would impact my credit score.
Because it would be my only open installment loan, I knew it could improve my credit mix—which might help my score. But opening a new account also lowers the average age of my accounts, which could hurt my score.
The MAF loan was reported as an unsecured $2,400 loan with a $200 monthly payment. I used my free Experian account to track my FICO® Score☉ 8 score and was a little surprised to find the loan didn't have a noticeable impact. The first lending circle loan payment was reported in February 2021, and my score stayed around 785 for the months before and after that point. That may be, in part, because I have a lot of credit accounts and a long history of making on-time payments.
A lending circle loan could hurt my credit if I miss a payment. But MAF says that participants who are having trouble may be able to work out alternative payment plans with MAF or their lending circle provider.
Additionally, once I pay off the loan, I know that it can stay on my credit report for 10 years (albeit noted as "closed") and my positive payment history can continue to help my credit during this time. However, I won't be surprised if my credit score takes a small hit right after the loan is paid off—that's common as well.
Pros and Cons of Using a Lending Circle Loan
Generally, a lending circle loan could be helpful in building your credit and providing a cash infusion. But there are some pros and cons to consider.
- No credit requirement or hard credit check
- No interest, application fee or origination fee
- Reports to all three major credit bureaus
- You're able to help other lending circle members
- It could take a few weeks to get started
- You might not receive the loan disbursement when you want
- There may be fees for missed and returned payments
Would I Do It Again?
Overall, the process took longer than I expected. Here's the timeline of events in my case, which could vary depending on your situation and organization:
November 3, 2020: Submitted my application
December 8, 2020: Joined the lending circle formation
December 17, 2020: Made my first payment
April 25, 2021: Received my distribution
Still, I'm glad I joined a lending circle. And now that I know what to expect, I would definitely consider signing up for another one in the future.
MAF also frequently hosts free financial chats in English and Spanish. If you want to see where your credit is at, Experian lets you check your credit report and score for free. Your account can also explain what factors are most impacting your score and how you may be able to improve your credit.