What Is a Lending Circle and How Does It Work?
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If you’re in need of cash and fast, traditional loans aren’t always the most efficient way to get funds. Personal loans often require soon-to-be borrowers to go through a lengthy application process with financial institutions and put a hard inquiry on their credit report. Plus, the wait time for approval could be days or even weeks, depending on which lender you go with. Not to mention there are high interest rates and additional fees to think about.
The good news? There is a way to bypass the headaches that come with most traditional lending options. Enter: the lending circle.
In this article
What is a lending circle?
Lending circles (sometimes referred to as rotational savings clubs, or rotational savings and credit associations) give members access to small-dollar, zero-interest, low-cost loans that are funded by the group.
The concept is simple: a group of people get together and contribute money to a pool of capital each month. Every month, one person receives the total amount. This way, everyone wins — each member can work towards paying off their existing debt and there’s never any interest or new debt to deal with, depending on the group’s arrangement, so it can be a great credit-building tool. It’s kind of like a Super Bowl block pool, except you’re guaranteed a small windfall by the 10th month.
Use Quicken Loans to Get a Personal Loan
- If you're tight on cash right now, you may want to consider getting a personal loan. A personal loan is a loan that you can use for just about any purpose like: paying off other debt, renovating your home, or family needs like a wedding or adoption.
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Traditional vs. online lending circles
Lending circles have been used as an informal form of banking for centuries and serve as a “critical function in an immigrant community” by enabling members to increase their credit scores and reduce their debt.
Traditional lending circles consisted of members of a family or a close group of friends. Teaming up with people whom you know, love, and trust creates a social obligation to hold up your end of the deal and pay your share each month. Online lending circles, however, base a member’s creditworthiness on their past participation. Some online lending circles report on-time repayments to the credit bureaus, giving members the chance to .
How do lending circles work?
Lending circles give borrowers the ability to raise money for small-to-medium expenses, including down payments and credit card debt, by allowing members to borrow money in cycles. Although every circle has its own rules, most lending circles follow the same three steps:
- Terms. The first thing members of a lending circle need to decide and agree on is the loan amount and repayment terms. They’ll also need to decide on whether there will be any interest or fees (late fees, origination fee, etc.)
- Contribution. Each month each member of the lending circle is required to contribute a set amount to the pool. This amount is set and agreed on beforehand. Some lending circles ask members to contribute every two weeks.
- Rotation. Each month, one member of the group is allowed to withdraw from the pool. Members take turns withdrawing until each person has borrowed. Once each person gets a turn, the cycle is over.
Lending circle companies
Mission Asset Fund (MAF)
Mission Asset Fund (MAF) is one of the most well-known lending circle companies. According to the company’s website, MAF offers loan amounts between $300 and $2,400 with typical monthly payments ranging from $50 to $200. To join a lending circle via MAF, fill out an application and take one or more online financial education courses, join a group (decide on the amount, loan order, and sign the loan documents), and receive your loan when it’s your turn. MAF reports payments to the credit bureaus, so you can build your credit while you wait. To participate, potential members must be able to prove that they have a reliable source of income and a manageable amount of debt.
Esusu
Esusu is a mobile app that gives users the option to create a lending circle with friends or family members using their phones. There’s a $10 flat fee per group, per pay cycle. Esusu members need a smartphone (iOS and Android users are welcome), US social security number, a driver’s license, and a US bank account. In addition to reporting on-time payments to the credit bureaus, Esusu provides members with an “Esusu score” that may suffice in place of a to help members further continue to build their credit.
Pros and cons
Pros
- Low-cost funding. Lending circles provide individuals with an affordable way to get funding, regardless of their credit score.
- Build credit. Some lending circles report on-time payments to the credit bureaus, this way members can slowly build their credit without taking on more debt.
- Interest-free loans. Lending circles are interest-free so members can borrow money without dealing with outrageous interest rates.
- No minimum credit score. The purpose of a lending circle is to give individuals with little to no credit access to funds without pulling their credit history or going through a lengthy application process.
- Borrow from people you trust. Traditional lending circles give you the option to borrow from people you know and trust. If you choose to use an online lending platform, you should be provided with the payment history of the other members of the group.
- Multiple loan options. With a lending circle, you’re in control. Lending circles allow members to decide on the loan amount and repayment terms, so you can borrow according to what works best for you and your budget.
Cons
- Steady income. In order to be a part of an online lending circle, you’ll need to be able to prove that you have a reliable source of income and can afford the monthly cost. This may be hard for some potential applicants to prove, especially for those who are independent contractors.
- Low debt-to-income ratio. Individuals who have a high debt-to-income ratio (50% or higher) may not qualify or be able to join a lending circle.
- Time. Participating in a lending circle may not be the best option for you if you’re in a hurry and in need of immediate funds.
- Late payment fees and consequences. Lending circles report on-time payments as well as late payments. Missing a payment could negatively affect your credit score.
- Additional fees. Some lending circles charge members a percentage to borrow first. Be sure to read the fine print before signing an agreement.
Use Quicken Loans to Get a Personal Loan
- If you're tight on cash right now, you may want to consider getting a personal loan. A personal loan is a loan that you can use for just about any purpose like: paying off other debt, renovating your home, or family needs like a wedding or adoption.
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience.
Lending circle alternatives
Lending circles offer borrowers an interest-free way to borrow money, but depending on your specific situation, an alternative option may be the better choice. Here are a few borrowing options to choose from.
Small business loans
If you’re in need of cash to help boost your business, a small business loan may be the way to go. Before you can apply for a small business loan, you’ll need to decide on whether you want to apply for a secured business loan or an unsecured business loan. Business loans without security or collateral are risky for the lender but well suited for business owners who don’t want to risk putting their car or home on the line.
Business loans are more difficult to snag, especially if you own a small, fairly new startup. Established businesses with collateral and strong credit are more likely to qualify for a small business loan. Other types of business financing include term loans, business lines of credit, and business credit cards.
Personal loans
When it comes to personal loans, there are hundreds of companies to choose from. And, if you use a Better Business Bureau-accredited credit monitoring site like or , it’s likely you’ll get better loan offers tailored to your specific needs. Before you can decide on which company to go with, you’ll need to do a bit of research and comparison.
Check your credit, make sure your credit report is free of inaccuracies, and be sure to read the fine print and read reviews on TrustPilot or BBB. Some loans, for example, require borrowers to use the funds for a specific reason (e.g. consolidation), whereas others are more flexible (e.g. no origination fee or prepayment penalty).
Related: Best Personal Loans for Bad Credit
Paycheck advance
If you need cash quickly your employer may agree to give you a paycheck advance, also known as a cash advance. Cash advances are like a smarter and safer alternative to a payday loan. (Payday loans carry high interest rates and can trap borrowers in a circle of debt!)
With a paycheck advance, the employer allows an employee to borrow against their next paycheck. Usually, there are rules about how much an employee can borrow (e.g. no more than 50% of their paycheck).
Use Quicken Loans to Get a Personal Loan
- If you're tight on cash right now, you may want to consider getting a personal loan. A personal loan is a loan that you can use for just about any purpose like: paying off other debt, renovating your home, or family needs like a wedding or adoption.
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience.
The bottom line
Lending circles are a great option for individuals who need funds to cover unexpected costs or small business owners who need a little help getting their startups off the ground. Lending circles are usually inexpensive and carry little to no financial risk as long as you make your monthly payment on time.
Even so, lending circles require members to take turns. If you’re in need of emergency cash, you may need to look for an alternative option, such as a peer lending platform (e.g. Upstart, , , etc.) or an alternative online lender.
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Writer
Tabitha Britt is a New York-based freelance writer and editor whose work has appeared on INSIDER, the Huffington Post, and Taste of Home. When she's not glued to her computer screen, she can be found walking her beloved pooch, Biscuit.
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