What Is a Lending Circle?

What Is a Lending Circle? article image.

The lending circle concept isn't complicated, and it's been used around the world for hundreds of years (maybe longer). Here's an example: You and nine members of your extended family decide to start a lending circle. You each contribute $50 a month, and every month one of you receives the whole pot: $500. In this arrangement, no one ever accrues debt, no one pays more than $50 in a month and each person is guaranteed a small windfall every 10 months.

Modern lending circles have evolved around this basic idea—that people contributing to a common pool of capital can lend to each other without interest and without racking up revolving debt. Platforms like Mission Asset Fund and Esusu facilitate the process and can even help you build credit by reporting your lending circle activity to credit reporting agencies. Lending circles may work well for people who need loans for bad credit.

Lending circles are an old idea with modern applications, but they may not be right for every situation. Read on to learn more about how lending circles work and whether or not they're right for you.

How Do Lending Circles Work?

Lending circles have existed across cultures for a long time. Today, borrowers in the U.S. can use formalized versions of this form of peer-to-peer lending to establish savings, build credit and access small loans among friends and family, between businesses or within their communities. Find out more about getting a loan through a lending circle.

Online platforms make it easier to set up and manage lending circles in the modern age. For example, lending circle platform Esusu offers a rotational savings group account that automates the process with monthly automatic bank withdrawals and online payouts. Participants create their own groups, set their own savings and lending goals, and pay a $10 monthly subscription fee for the platform's convenience.

Borrowers who want to try a lending circle but don't have a peer group to work with can find partners through the Mission Asset Fund (MAF). Mission Asset Fund began as a community-based nonprofit serving San Francisco's diverse Mission district. In 2008, MAF launched its Lending Circles program online to help encourage people to open bank accounts, avoid predatory lenders and build credit. Interested borrowers can fill out an online application, complete a financial education module, join a lending group and begin making payments and receiving zero-interest loans of up to $2,400 for individuals and $2,500 for businesses. MAF provides tools like loan documents and a mobile app to support the process. Payments are guaranteed, so if someone in your circle misses their payments, you'll still receive your full payout.

How Do Lending Circles Help You Build Credit?

Lending circles provide a way for people with little or no credit history to establish and expand a credit profile that could open up options for obtaining other types of credit.

The only way a lending circle will help you build credit, however, is if its payments are reported to one or more of the three national consumer credit bureaus: Experian, TransUnion and Equifax. Both Esusu and Mission Asset Fund report loan payments to all three bureaus.

A lending circle loan can help you build credit by:

  • Adding accounts (also known as tradelines) to your credit report so you can become scoreable.
  • Reporting loan payments that show a positive payment history. Paying all your bills on time is the single best way to improve your credit score.
  • Expanding your credit mix, or the types of loans you manage.

Keep in mind, however, that if you miss loan payments, your credit will take a hit.

Is a Lending Circle Right for You?

Lending circles can benefit nearly anyone who has a use for periodic interest-free loans or wants to build their credit profile. They're probably most beneficial for borrowers who haven't established credit yet and can use an occasional capital infusion to shore up savings or save up for large expenses. A lending circle can be a powerful financial resource, helping its members leverage their collective financial power, even when they don't have much financial power individually. At the same time, a lending circle can help you establish a credit history and improve your credit scores.

Lending circles aren't as helpful for borrowers who need immediate cash or steady access to an available line of credit. If it's not your turn to collect the monthly payout, you won't have access to lending circle money—but you'll still owe your monthly contribution.

Lending circles also draw their appeal from the idea of creating a network. You and the other people in your circle agree to trust and support each other. Even if your only interaction is virtual, this—and the monthly ritual of exchanging money—can be a source of community. On the other hand, if you don't crave that feeling of community support, you might be just as happy with a more anonymous form of borrowing.

How Can You Find a Lending Circle?

Mission Asset Fund and Esusu are the two platforms referenced most often when it comes to joining a formalized lending circle. Mission Asset Fund also works with a number of community development organizations, so you may be able to find a lending circle through a local community group, especially if you're interested in joining a circle with other business owners. You can check MAF's directory of lending circles to see if there's one in your area. At this time, you can only join a lending circle through MAF if there's one within your ZIP code.

Do you have your own group of family, friends or colleagues? Esusu's savings app makes it easy to enroll a rotational savings group, set up automatic bank withdrawals and establish a payout plan. Everything happens digitally, so there's relatively little administrative work to do to launch and maintain your lending circle.

What Are Your Funding Alternatives?

If a lending circle doesn't sound right for you—or you want access to more than one type of credit—these alternatives may help:

  • Peer-to-peer lending through online platforms such as Prosper connects people who want to lend money with individuals or businesses that need loans (though you won't actually have contact with those lending you the money, as you would with a lending circle).
  • Personal loans help you fund debt consolidation, home improvements, large expenses and more with installment loans. You can find personal loans that may be right for you with Experian CreditMatch™.
  • Credit cards may be an option, whether you have excellent credit or are just starting out. Your interest rate and terms will vary depending on your credit score (if you have one) and history. If you're new to credit or have had some hiccups managing credit in the past, secured credit cards or credit cards for bad credit may be good options.
  • Family and friends don't have to join a lending circle to provide resources when you need them. Although it's a good practice to treat loans from friends and family with the same conscientiousness you would a bank loan, you won't need bank approval to secure a loan as long as your friends and family are willing and able.

Closing the Circle

If you're looking for a way to build your credit—and build your savings or spending power in the process—a lending circle could provide the support you need. New credit users can also boost their credit scores with Experian Boost®ø, which lets you add your good payment history on utilities, phone bills and even streaming services to bolster your credit.

As you work to build your credit profile, also consider free credit monitoring from Experian. You'll receive alerts whenever your credit score and report change so you can track your progress as your credit improves.