Credible takeaways
- A lending circle refers to a group of people pooling funds together on a recurring basis until each member receives a loan.
- They often don't require credit checks or the paying of interest.
- They can be hard to coordinate and come with the risk that people won't follow through.
- Alternatives to lending circles include personal loans, PALs, cash advance apps, and more.
If you're looking for a way to borrow money that won't involve a credit check or interest, a lending circle may be a good option. Lending circles are groups of people who agree to pool their funds together and extend each other loans. These can be helpful if you can't qualify for more traditional forms of lending.
A new poll from the National True Cost of Living Coalition found that 40% of all Americans are unable to plan their finances beyond their next paycheck. Cost of living is impacting how Americans save. Turning to solutions like lending circles or other alternatives are becoming worth considering, now more than ever. We break down how lending circles work, the pros and cons, and five flexible alternatives.
How does a lending circle work?
A lending circle involves a group of people who agree to pool their funds together on a recurring basis and take turns getting interest-free or low interest loans, depending on the arrangement. For example, let's say 10 family members agree to start a lending circle where each family member contributes $500 per month. One family member per month would get the pooled amount of $5,000. The lending circle would continue for 10 months until each member has received the $5,000.
How do you join a lending circle?
Lending circles are generally formed between groups of people that like, know, and trust each other. It could be an agreement made between friends, family members, or business partners. If you want to join one, you could start it yourself or ask around about them.
Alternatively, you can now look for formal lending circles online with the help of organizations like the Mission Asset Fund (MAF). MAF is a non-profit organization that manages lending circles of six to 12 people that pay out loan amounts ranging from $300 to $2,400. To join, you'll have to apply, take an educational course, and sign loan documents.
Can you build credit with a lending circle?
Joining a formal lending circle may help you build credit. MAF, for example, reports lending circle payments to all three consumer credit bureaus - Equifax, TransUnion, and Experian. However, many lending circles operate outside of the credit system. They're often based on informal agreements between groups of people that don't involve a lending intermediary.
When the latter is the case, you won't build credit but can build trust with others in the circle. As a result, they may be more willing to invite you to future lending circles and trust you with larger amounts.
Lending circle disadvantages
Lending circles can be appealing, especially when they don't require you to pass a credit check, get approved by a lender, or pay to borrow money. However, there are a few potential drawbacks. For one, it can be hard to find a lending circle or get one going. It's not quite as easy as, say, finding a personal loan.
There's also an inherent risk involved. You may invest money to fund other people's loans only to find that others drop out before funding yours. Further, if you run into a financial hardship and can't pay the amounts you promised, you'll let down others in the group, could damage those relationships, and could incur credit damage (if you're in a formal lending circle).
5 lending circle alternatives
1. Bad credit personal loans
A personal loan is a type of installment loan that allows you to borrow money from a lender in a lump sum. You then pay the loan back in monthly installments over a set period of time. There are a handful of lenders that work with you even if you have bad credit (a FICO score below 580).
Personal loans tend to have annual percentage rates (APRs) from 7% to 36%. If you are a bad credit borrower you may be looking at a higher rate than if you have good-to-excellent credit. For example, the average interest rate for a three-year personal loan with a credit score below 599 was 27.88%, according to Credible data.
If you're interested in a personal loan, prequalify with multiple to see if you could be eligible for a loan. Prequalification usually involves a soft credit check which doesn't impact your score and allows you to see estimated terms and rates for a loan. It's not an official offer of credit, though, and if you choose to officially apply your rates may change.
Learn More: Types of Bad Credit Loans
Good to know
If you submit an application with a personal loan lender they will conduct a hard credit check which may ding your score by a few points.
2. Cash advance apps
You may be familiar with a cash advance on a credit card, but cash advance apps allow you to get small amounts of cash from your upcoming paycheck - often between $100 and $750.
These amounts are usually repaid by your next paycheck and cash advance apps typically don't charge interest or require a credit check. However, some apps charge fees such as expedited funds fees, subscription fees, or optional tips that can equate to high APRs, but they may still be more affordable than a payday loan.
To qualify, the apps generally require you to connect your bank account so they can analyze your income and activity patterns. Then, upon approval, you're allowed to advance up to a certain amount each pay period. EarnIn and Dave are two options you can consider.
3. Crowdfunding
Crowdfunding involves creating a fundraising campaign that explains who you are, how much money you need, and why you need it. You then share the campaign with your friends, family, and the general public in hopes that the "crowd" will make donations to help you reach your goal. For example, if your pet unexpectedly needs emergency surgery, you could start a crowdfunding campaign asking for help with the costs. Many platforms exist that host these types of campaigns such as Kickstarter, GoFundMe, and Indiegogo.
Important
Crowdfunding sites generate their revenue from a percentage of the funds you raise. For example, GoFundMe has a transaction fee of 2.9% plus $0.30 for each donation that is automatically deducted.
4. Payday alternative loans (PALs)
Payday loans have been deemed predatory in many states due to their high costs and short repayment terms. In response, federal credit unions developed payday alternative loans (PALs). PALs are small, short-term loans like payday loans but with much more reasonable rates and terms. They come in amounts up to $2,000, with terms of one to 12 months, and APRs of 28% or less.
5. Loan from friends or family
A loan from a friend or family member has pros and cons similar to a lending circle. In many cases, friends and family members won't charge you interest or fees. Additionally, you usually don't have to undergo a credit check. However, the loan will be secured by your relationship in a sense. If you don't repay it as promised, it could have some undesirable consequences. If you choose to borrow from a family or friend, set the loan up in writing to avoid any miscommunication around terms and repayment.
FAQ
Do you need good credit to join a lending circle?
No, you often don't need good credit to join lending circles. Lending circles are typically formed by groups of people that know and trust each other. However, if formal lending circles continue to grow, credit checks will likely become more common.
Where can I get a loan with bad credit?
If you have bad credit, you can look into bad credit personal loans, cash advance apps, loans from friends or family, PALs, or crowdfunding. There are lenders that will approve applicants despite bad credit and those that don't check credit at all. It's important to be cautious of no-credit-check lenders as they can be predatory, offering loans with high fees and short repayment terms that can lead to an ongoing cycle of debt.
Is a lending circle legit?
A lending circle is as legit as the people in it or the company facilitating it. If it's a trust-based lending circle and everyone pays as planned, it can work well and offer great perks. However, if anyone doesn't hold up their end of the deal, others could get less than they bargained for.
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