A lending circle is formed when a group of friends or family come together to contribute a specific amount of money each month and lend it to one another in turn. Thus, each month sees another member benefit from the monthly money raised by the group. The circle is completed when every member of the group has received their share. The money, known as a lending circle loan, is lent at zero interest rate and is paid back gradually in the form of monthly contributions. This can also be called a saving circle, which operates just like a lending circle but the purpose of the group is to save for financial goals like emergencies or travel. There are two types of lending circles; the traditional and the digital. The traditional form is the oldest and most popular, while the digital circle is new and can be done via an app.
Lending circles have been in existence since Adam and are very popular throughout the world. It has been a source of joy for many people as it provides them with the financial resources to solve their financial problems. Many people who have subscribed to lending circles have reportedly witnessed a surge in their finances. Some have used lending circles as a means to their financial freedom. Others have purchased their dream cars, paid off outstanding debts, and have traveled to their favorite destinations with the help of money from lending circles.
Though they have been around for ages, financial institutions are now catching on to them and are making inroads into the world of lending circles. This has helped participants access financial products from banks and other lending institutions at lower interest rates. Since lending circle loans are manageable, participants easily pay off these loans, thus building up creditworthiness that allows them to latch on to financial products.
Lending circles operate mainly based on trust. Once you are a part of the circle, it is believed that you’ll be faithful in paying. Most circles have participants ranging from 6 to 10, though you can have as many as you want. After the number of participants is determined, the group then decides on how much each member should pay monthly. This is discussed thoroughly to ensure that every member is comfortable parting ways with the set amount at the end of every month. The group then decides the terms and conditions governing the lending circle loans.
Members then list their names in order of the recipients of the loans. Some groups choose to ballot to decide the order in which the loans will be disbursed. Once all the paperwork is sorted out, the contributions begin. For example, if the group is made up of 10 participants and the agreed monthly contribution is $100 per head, that amounts to $1,000 every month. Thus, the loan is $1,000. The $1,000 is then given to the first person on the list. Then another round of contribution is done the following month and the money is given to the next person on the list. This is repeated until everyone on the list receives the pot of money which, in this case, is $1,000.
The lending circle ends after the 10th month when all members have received their pot of money. It must, however, be noted that the recipient of the $1000 also contributes in the same month they receive their loan. After which the circle is disbanded and a new one is formed, though this doesn’t apply to all circles. The reason some groups choose to disband and form new groups is to allow new members to join. It is also to make sure that every member joins the lending circle out of a free will, and not compulsion.
Starting a traditional lending circle is pretty easy once you explain the concept to your target audience. Each participant needs to apply to be a part of the circle and must give reasons. Each applicant must indicate how much they earn monthly and the debts they owe. This is to determine which applicant is likely to be a liability to the circle.
Now that the applicants have completed their financial literacy education, it’s time for the real deal. However, before you begin taking or dishing out money, decide on the terms and conditions that’ll govern the group and the lending circle loans. The monthly contributions and the loan amount should also be decided at this stage. You can decide a fixed date of the month on which each participant should pay the contribution or make the contribution flexible. However, regardless of which mode of contribution you adopt, every participant should finish paying by the last day of the month.
After the group has agreed on the monthly contribution and the loan amount, the next step is to draw the list of beneficiaries. You can either use a voting system or cast ballots to determine the order of beneficiaries. Make sure all members are comfortable with the order in which they’ll each receive the loans.
Applicants should be advised to join a financial literacy program. Lessons can be limited to a few topics like budgeting, saving, wealth-building, and investing. This would provide the applicants with the requisite financial knowledge to maximize their savings from the lending circle and work towards financial freedom.
First, you will need to decide on the terms and conditions that’ll govern the group. The monthly contributions and the loan amount could be decided by the originator of the lending circle or by the participants.You can decide a fixed date of the month on which each participant should pay the contribution or make the date flexible. However, regardless of which mode of contribution you adopt, every participant should finish paying by the last day of the month.
The next step is to invite friends or family or colleagues to your circle. It important to only invite people you trust. Now is also a great time to share the terms and condition. It’s important to consider the earning capacity of participants to avoid defaults. Once you have invited the participants and shared the terms and condition. You can either use a voting system or cast ballots to determine the order of beneficiaries. Make sure all members are comfortable with the order in which they’ll receive the loans.
Now that the applicants have completed their financial literacy education, it’s time for the real deal. Once all the hurdles are cleared, it is time to start taking the contributions. Remember this is done monthly and the loans disbursed to each recipient according to the list. So, make sure by the last day of each month, each member would’ve paid their contributions into the pool. The loans can be disbursed the same day or the following week.
Starting a digital lending circle is not so different from the traditional way. However, a digital lending circle makes the process of launching a circle, inviting participates, creating terms and condition and disbursing monthly contributions more straightforward and easier. If your think of creating a lending circle you should explore the GuardianWealth app
Here are some benefits of a digital lending circle or a lending circle app:
– Creating terms and condition: With a digital lending circle this process is automated and all you need to do is fill in the blanks.
– Inviting participants: With a click of a button you can share a link to prospective participants, who can use the link to join your lending circle and view the terms and condition.
– Creating an ordering system: This process can also be automated and done for you by an app.
– Contribution and distribution: With an app, participants don’t have to send their monthly contributions to the originator and then the originator sends the contributed sum to the scheduled recipient. An app automates this process, such that every month a fixed sum is withdrawn from each participants account and deposited in the scheduled recipient account. All of this is done without any participants lifting a finger.
A digital version makes lending circle easier to form, manage and reduces default among participants. Check out some other benefits below under the use cases.
If you need money urgently, you can vote to receive money first. With this you are essentially borrowing money from the group, which you will pay back subsequently with your monthly contributions. This is where the name lending circle emerged. However, you will see other use cases below.
As stated earlier, a lending circle can help you build a credit score. Most lending circle loans are interest-free or charge very low interest, making it easier to pay off the loan. The monthly contribution doesn’t put an unnecessary strain on members since applicants are at liberty to choose whatever amount they can comfortably pay. Building credits will help you access more financial products from banks and financial institutions. If your credit scores are high, then you are more likely to get loans from banks at a lower rate.
Helps you save more
If you have difficulties in saving, then this is a golden opportunity for you. The compulsory regular monthly contributions put you on your toes and force you to save. You are also motivated to save by the circle of family and friends. As a first-time saver, you can use a saving circle to build an emergency fund. A saving circle app that can help you save more and enjoy financial freedom is the GuardianWealth group saving and saving circle app. The app enables you, your family, and your friends to pool funds and save together while building credit scores.
Saving circle helps you, your family and your friends to become financially secure. It is a great way to introduce younger members of your circle to saving.
Lending/Saving circles have helped several people to build the right saving habit. As a loan repayment system, it’s low to no interest rate puts less strain on participants. As a saving circle, this is a great way to force yourself to save. Lastly, digital lending circles can be used to build your credit.