Lending Circles Help Disadvantaged Borrowers Gain Access to Credit

Javiar Giron declared bankruptcy seven years ago. Since his arrival in the United States in 1985, the 46-year-old father of three had been doing well: he had studied English on the street, purchased a home, and managed a carpet business. He started buying and selling houses on the side, or “flipping,” but the housing market plummeted, and he lost two of his properties to banks.

Giron is climbing out of his financial rut by joining a lending circle — a type of peer-to-peer lending – as a method to save money and establish credit with a no-interest, no-fee microloan. From Massachusetts to California, people are participating in this age-old tradition.

“In the United States, credit is gold,” Giron explains. “You don’t have any credit, you don’t have anything,” says the narrator.

Asset Fund for Missions

Giron’s circle, in which a group of people lend money to one another, is facilitated by the Mission Asset Fund. MAF, a charity based in San Francisco, formalizes a previously unofficial practice in part to keep members away from payday lenders and other high-cost short-term borrowing.

The organization gathers a group of roughly ten low- and moderate-income people to form a circle. The collected group settles on a loan amount, such as $1,000, as a group. The members then donate a portion of that amount — in this case, $100 each – to the pool of funds each month, and one person receives the entire $1,000 each time. By the tenth month, all participants will have received the agreed-upon sum, and all loans will be completely paid off.

Lending circles assist members in raising funds for a variety of purposes, including car down payments, debt repayment, and small company investments, among others. However, the microloans, which MAF guarantees, are more about improving credit scores so that borrowers may access conventional financial services.Lending circles provide opportunities for learning.

“Part of it is an educational process, making sure they’re budgeting and getting them to a point where they can make sound financial decisions,” says Jose Quinonez, MAF’s CEO.

There are no set prerequisites to join one of the circles, though the group discourages those who spend more than half of their income on debt payments. Those who do join sign contracts with MAF, which ensures that each member would receive their money back if one or more members fail to pay their portion to the circle.

Quinonez describes the lending circle as having “sort of like a mini-FDIC insurance,” alluding to the Federal Deposit Insurance Corp., which insures bank deposits. “The guarantee that we provide provides them more peace of mind because they know the building will hold.”

Default rates in MAF circles are fewer than 1%, mainly because to the social obligation that belonging to such a group involves. Participants can benefit from boosting their credit ratings because the organization discloses all payment information to credit agencies TransUnion and Experian.
A lending network

With donations and contributions, major banks such as JPMorgan Chase and Citigroup assist MAF. They have the same purpose of assisting consumers in achieving good credit scores so that they can obtain loans from traditional lenders.

Quinonez believes, “We are obviously generating a consumer good.” “Banks gain from our efforts since we are increasing the pool of qualified borrowers.” MAF has assisted hundreds of borrowers in obtaining a total of $3 million in social loans since its inception in 2007.

Shweta Kohli, 33, claims that since she began saving through MAF three years ago, her credit score has increased by more than 120 points. Despite the fact that her credit is good enough for her to hold accounts with Citibank and two local credit unions, she continues to participate in lending circles and has no plans to stop anytime soon. Kohli appreciates MAF’s advice as she plans to launch a retro-style Indian fusion café in San Francisco.

“They’ll help you discover the proper loan, the correct application process, and the right answers to give to a small company loan officer,” she says.
A time-tested method

For centuries, informal lending circles have existed in societies all throughout the world. Depending on where you travel, they’re called tandas, cuninhas, hui, or pandeiros. MAF’s ability to serve participants, particularly immigrants, is aided by familiarity with the lending circle concept.

“I’m familiar with tandas,” Giron explains. “I recall my mother in Mexico using it to purchase clothing for my five brothers and sisters, as well as me.”

Specific MAF lending circles help immigrants save the $680 required to apply for US citizenship or the $465 required to apply for temporary resident status under the Deferred Action for Childhood Arrivals (DACA) program, which provides young immigrants with work permits and protection from deportation.

Jessica Guerrero, 22, enrolled in MAF’s Lending Circle for Dreamers program in 2012 to help pay for her DACA application fee. She was tending tables at the time to pay for her San Francisco State University tuition, rent, food, and transportation, all of which she had to pay for herself. Guerrero, like Giron, grew up in Mexico and was familiar with tandas.

“I thought to myself, ‘OK, I’m not going to be able to pay $500 in one month; I don’t have that kind of income,” she says of the DACA application fee.

Guerrero also values MAF’s financial education, which includes online lectures on saving and checking accounts, credit, mortgages, and money-management workshops.

Guerrero says, “The community in this area has no information — there is no financial education whatsoever, and that is a tremendous concern.” “We’re just getting by, day by day.”
Creating a larger circle

MAF’s lending circles have shown to be beneficial, according to research. According to a 2013 study by researchers at San Francisco State University, participants improved their credit ratings by an average of 163 points and reduced their outstanding debt by more than $1,000.

MAF has helped more than 27 nonprofit organizations in 11 states, including California, Oregon, Nevada, Washington, Minnesota, and Massachusetts, implement the formalized lending circle technique. Yattos, a San Francisco-based firm, also offers similar online models that allow users to establish circles or connect with friends to obtain interest-free microloans and save money.

Guerrero told her friends and family about lending circles, including her mother, who recently joined one to start saving for a car and developing credit.

“Where I’m going to school, there are a lot of resources,” Guerrero adds, commenting on how she’s assisting others in finding credit-building possibilities through MAF. “People I meet or know – relatives and friends – they don’t have the chance that I’ve created for myself, so now I can connect them.”