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What Is the Definition of a Lending Circle and How Does It Work?

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What Is an Lending Circle and How Does It Work?
An lending circle loan is a low-interest option to borrow money and increase credit.


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The concept of a lending circle an ancient idea wherein an entire group of people, mostly close friends or family members, set aside a particular amount of money and then give it to a member of the group. These are commonplace in different cultures across the world , and are also known as tandas, susus , or Hui, depending on the location you're in.
This type of borrowing and lending is very popular as the cash is not a source of interest and it helps participants pay for unexpected or other planned expenses. Nowadays those who participate in lending circles can even build credit.
What is a lending circle and how does it work?
Lending circles help participants raise funds to cover various expenses such as down payments as well as small-business investment.
The group decides on the loan amount, which could be, for instance 1,000 dollars. Each member contributes a part of the loan, say $100 per person for the fund pool every month, and one member gets the full $1,000 every time.
Informal lending circles are able to agree on the order of payments that can be changed in the event that one member has an urgent need for the money.
By the 10th month, all participants will have received $1,000. The loan is free of charge and no or very low rate of interest, based on the agreement of the group.
The social incentive to pay back the loan successfully because lending circles typically consist of people you know and trust.
The role of a lending circle is to help build credit
Companies such as the nonprofit Mission Asset Fund help participants create lending circles and improve their credit scores.
Credit scores give you access to financial products , such as loans and credit cards, and a higher score means low interest charges.
There are no requirements to participate in a lending circle other than that you have an income source and a reasonable amount of debt, says Jose Quinonez, Mission Asset Fund's CEO and founder.
Lending circle alternatives
Because they're interest-free, lending circles are among the least expensive methods of borrowing money. Compare them to other credit-building and borrowing options.
Other methods to build credit
. Credit cards that are secured require deposit that's usually equal to the credit limit. The card issuer keeps the deposit in case you don't pay the bill, and reports payments to the credit bureaus each time you make use of the card and pay the balance. The deposit is returned when you have closed the account. You don't require a credit score to be able to secure a credit card.
. A credit-builder loan allows you to reduce your expenses while building credit. A lender holds onto the amount you want to borrow until you've made payments. The lender reports the payment to credit bureaus, and releases the cash when you've paid off the loan. Community banks and credit unions offer these, but and both of them offer them online.

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Alternative ways to earn cash
. Local nonprofits, charities and religious organizations can help you get food, clothing and transportation. If you're struggling to pay for the cost of living, call your landlord, utility company or mortgage provider to delay payments, or reach out to a for long-term help.

. Find a low- or no-cost loan from a trusted person. Both you and the lender could draw up a repayment plan, including payment amounts and how the money will be used. The combination of money and relationships could be risky, so ensure that both parties are comfortable with the agreement.
Paycheck advance. Your employer may ask for an early release of your paycheck or draw money from your future earnings. Loan apps may charge small fees, and cashing in early means you won't receive your full pay on payday, so 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 company. Although there's no need to be interested however, this may need the luxury of time.

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Nerdy Tip
The lending circles that helps you build credit is a cheaper and safer method to borrow cash than relying on a payday lender. Payday loans have high rates of interest, are due in a short period of time, and allow for to rollover the loan, all of which can trap you in a spiral of credit. In contrast, a lending circle lets you take out loans at no or extremely low cost, usually from people in your own community.




The authors' bios: Amrita Jayakumar was a writer at NerdWallet. She has previously worked for 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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