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Lending Circles Revive a Time-Tested Concept

· money,loan,funds

Peer-to-peer lending became exceptionally popular after the 2008 economic crisis. However, the idea is not exactly new, and the advent of the Internet has somewhat changed the meaning of a peer-to-peer loan. More recently, the concept of lending circles has become more visible in the mainstream.

Lending circles are exactly what they sound like. They are a way for individuals to collectively get together and save money that they can access later. Adding to this, many individuals with low incomes use lending circles as a tool to build credit.

Lending Circles and Mutual Aid Societies Explained

Lending circles are considered an alternative to mainstream financial services and insurance. The goal of a lending circle is to not only foster a sense of community, but to shift the way individuals think about money. The loans eliminate fees and interest rates that are typical of larger financial institutions, thus allowing individuals to save more. Lending circles are not only about money. Members are also able to communicate with each other, discuss financial issues, and plan for their future in a supportive environment.

Participation in a lending circle is voluntary, and there usually no specific criteria that an individual must meet in order to gain access to one of these groups. Although no set criteria must be met to participate in a lending circle, experts in the field indicate that those with debt that exceeds 50 percent of their income may not be ideal candidates.

Lending Circles Used for a Variety of Purposes

Those who contribute to lending circles utilize them for a variety of expenses and purposes. These expenses could range from anticipated ones such as a vehicle purchase or tuition to unexpected emergencies for which one otherwise would not have otherwise been financially prepared.

While mutual aid is conceptually similar to a lending circle, it is a practice that has been around for hundreds of years and that was seen in the form of fraternal orders, lodges, and co-ops. During the Great Depression, mutual aid societies were prevalent throughout the US due to reduced consumer confidence in banks and the sense that banding together was necessary for survival.

The benefits of mutual aid societies were often not monetary in nature. Some benefits included exclusive services and invitations to social activities for networking purposes. Each member took part in the administration of the group and its affairs, and in some cases, there was enough capital to form charitable organizations, start businesses, and form credit unions.

Options for Borrowers

The Sustainable Economies Law Center (SELC) recently hosted a roundtable discussion titled “Mutual Aid Lending Circles, Giving Circles, and Gift Circles,” which gave lending circle participants and proponents a chance to communicate with one another and discuss the benefits and drawbacks of these programs.

In addition to popular mainstream lenders, there are a variety of lending circle and mutual aid societies available to consumers. In San Francisco, the nonprofit organization Mission Asset Fund (MAF) has found a way to revive lending circles, while also making the process somewhat more formal. The ultimate goal of MAF is to offer consumers an alternative to other short-term lending while educating them about finance and credit. MAF offers an alternative to short-term loans and knowledge of life circumstances that can lead consumers to seek out loans in the first place.
 

The Social Responsibility Factor

If a person doesn’t contribute to the lending circle as agreed, they are bound by a signed contract, guaranteeing that each member will still receive their money even if another member fails to meet their obligations. It should be noted that that the social responsibility factor seems to be a natural deterrent to default. In addition, MAF circles also report information to TransUnion and Experian credit bureaus, and members who do default will not see the improved credit benefits of those who fulfill their obligation to the group.

Although there is not a great deal of research on lending circles, the available research shows that these groups are successful overall. A study conducted by researchers at San Francisco State University backed up what was already known by those centuries ago: a collective savings and loan can have a great impact on certain types of consumers. Those who participated in the MAF’s lending circles saw their credit scores rise by an average of 168 points and their overall debt decrease by more than $1,000. Author David Green’s book Reinventing Civil Society: The Rediscovery of Welfare Without Politics indicated that these mutual aid societies were initially formed in response to the harsh realities of the economy and politics and indicated that these age-old societies would likely see a return as many consumers are shut out of traditional lending and are left with options such as payday loans.

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