Lending Circles AMPED-UP: A New Twist to an Old Asset Building Concept
Lending Circles are informal arrangements where individuals form a group and pool resources together to benefit each member of the group over time. These informal arrangements are common throughout the world and are known by different names and have varying structures.
Typically, individuals come together and select a point person or administrator, someone of trust, and agree on the terms of the Lending Circle: the amount paid by each member, the frequency of payments, and the distribution order. Thus, they agree to make manageable payments to the administrator on a periodic basis. The administrator collects the payments and distributes the lump sum amount collected to one of the members of the group following a predetermine order. Each member gets a turn to receive the lump sum and can choose to do what they wish with the funds. The key to the Lending Circle is that each member must commit to paying each month until everyone in the group has received their turn in collecting their lump sum disbursement. For those at the top of the list, the lump sum disbursement acts like a loan since they receive the funds up-front and commit to making payments until everyone has received their turn. For those towards the bottom of the list, it acts similar to a forced savings plan where they make the payments first and receive their lump sum towards the end. This peer to peer support relies on community relationships and resources that are typical of immigrant communities. The benefit of the Lending Circle is that participants are pooling their resources to help one another.
The Mission Asset Fund, in San Francisco, CA created a way to institutionalize Lending Circles. MAF established a model where the organization acted as the administrator of the circle, automated the deposit and withdrawal of payments through banking accounts, added a credit reporting component to help participants build credit and reduce payment risk and formalized the loan process by incorporating debt instruments such as promissory notes, loan disclosures, etc. MAF also provides a loan loss reserve and acts to support the circles by providing collateral.
Lawrence CommunityWorks and Mill Cities Community Investments (MCCI), a Community Development Financial Institution (CDFI)
Through our partnership, LCW and MCCI look to bring this formal model of Lending Circles to Lawrence and Merrimack Valley residents. Our model will incorporate financial literacy education, monthly peer support meetings, financial counseling, a savings match and it will also incorporate local lending institutions as partners.
The goal of the LCW LendingCircle Program is to create a vehicle for low/moderate income individuals to accomplish the following:
LCW launched its first LendingCircle February 2013!
With the help of Community Service Block Grant funding through the MA Department of Housing and Community Development, LCW is piloting the Lending Circle with 8 low-income participants. These applicants have identified various goals that they wish to pursue; fixing or improving credit, building on savings, starting small businesses or buying their first home. Participants will not only be able to access resources, they will also be able to develop sound money management and goal setting skills, build credit history, establish relationships with their peers while earning a $100 bonus for completing the Circle program.* The fund’s performance will be administered and backed by our partner Mill Cities Community Investments, with the 8 accounts to be hosted by one of our local banking partners, Merrimack Valley Federal Credit Union.
Maria Natera, an active member of LCW for many years, has participated in numerous LCW programs including: Wallet Wise, First Time Homebuyers, and the Lawrence Saves Campaign. Each step has created a stronger sense of a financial foundation for Maria’s family. She is now a member of the 2013 pilot LCW Lending Circle program.
LCW is very optimistic about the possibilities of this program. [LendingCircles’ use of peer resources, as a core component make them efficient and effective.] By adding elements that add stability and structure to the formula, we believe our LendingCircles program will help participants address a variety of barriers and improve their financial standing over time, while providing a valuable transformational experience. After the initial pilot program, we are looking to make qualification more flexible. Individuals can participate in multiple LendingCircles if they choose to, which opens up endless possibilities for saving and asset building with this model.
Photo – Maria Natera by Howard Kang, United Way