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What is a Lending Circle and How Does It work?

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What Is the Definition of a Lending Circle and How Does It work?
An lending circle loan is a low-interest way to borrow money and build credit.


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Last updated on Nov 8, 2022.

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A lending circle is a long-standing idea in which groups of people, usually family or friends, regularly pool a specific amount of money and then give it to a person in the group. These are commonplace in different cultures across the world and known as susus, tandas or hui, depending on where you go.
This kind of borrowing and lending is popular because the money can be interest-free and helps participants pay for unexpected or planned expenses. Nowadays the lending circle members can even build credit.
What exactly is a lending circle? function?
Lending circles allow participants to raise funds for various expenses, such as down payments as well as small-business investment.
The members of the group collectively decide on the loan amount, for example 1,000 dollars. Each member then contributes a portion of the loan, say $100 per person for the pool of funds every month, and one member is awarded the entire amount every time.
Informal lending circles have a consensus on the order of payments, which can change if one member is in urgent need of the money.
By the 10th month, all participants will have received $1,000. The loan is free of charge and there is no or very little interest, depending on the agreement of the group.
The social incentive to repay the loan effectively, as lending circles typically consist of individuals you trust and know.
A lending circle can help build credit
Companies like the non-profit Mission Asset Fund help participants to form lending circles and increase their credit scores.
A credit score grants you the ability to access financial products such as loans or credit cards and a higher credit score gets you lower interest rates.
There are no prerequisites to be a part of a lending circle except showing that you have an income source and have a reasonable amount of debt, according to Jose Quinonez, Mission Asset Fund's CEO and founder.
Alternatives to the lending circle
Because they're not a source of interest They're among the most affordable methods to borrow money. Compare them with other options for credit building and borrowing.
Other methods to increase credit
. Security-based cards need a cash deposit , which is usually the amount of your credit line. The issuer holds the deposit in case you fail to pay the bill and then reports the payments to credit bureaus as you make use of the card and make the payment. The deposit is returned once you've closed the account. You don't need good credit to get a secured credit card.
. A credit-builder loan forces you to save money while building credit. A lender holds onto the amount you'd like to borrow, while you make payments. The lender then reports the repayments to credit bureaus, and releases the money after you've paid back the loan. Credit unions and community banks provide these services, however, and both of them offer these online.

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Alternative ways to earn cash
. Local nonprofits, charities and religious groups can assist you to obtain food, clothing and transportation. If you're struggling to cover living expenses, contact your landlord, utility company or mortgage lender to defer the payment or contact an organization that can provide long-term assistance.

. Take advantage of a low-, or no-cost loan from someone you trust. The lender and you can make a repayment schedule, including payment amounts and how the money will be used. Combining relationships and money could be risky. Therefore, ensure that both parties are happy with the deal.
Paycheck advance. Request your employer to grant an early release of your paycheck or take a loan from future earnings. Loan apps may charge tiny fees. Cashing in advance means that you won't receive your full pay at the time of payday, so make sure you be sure to review your budget to ensure you won't miss any payments to your bill.
. It is possible to earn money through making money by selling clothing, freelance work or driving for a rideshare service. 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 can help you build credit is a lower-cost and more secure method of borrowing cash than relying on a payday lender. Payday loans have high rates of interest, are due in short time, and allow for rolling over of the loan, all of which can lead to an endless cycle of debt. However, a lending circle allows you to take out loans at no or minimal cost, typically from your neighbors in your community.




Authors' Bios Amrita Jayakumar was a writer for NerdWallet. She was previously employed by The Washington Post and the Miami Herald.


Annie Millerbernd, a private loans writer. Her work has appeared on The Associated Press and USA Today.







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