There’s an extensive, strangely formatted report that tells the story of our financial lives. Whether we truly understand it or not, its weight dictates our ability to buy a car, a home, apply for a credit card, and even get a job. It is, of course, our credit report — the neat charts and obscure listings financial institutions use to derive our credit score. The notion of credit is one of the building blocks of capitalism, and whether we like it or not, its traditional gatekeepers are financial institutions.
Access to credit is one of the many ways financial institutions like banks have a lasting presence in our everyday lives. They provide us bank accounts, credit cards, and home and auto loans. And the price for those services is dependent on the interest rates, calculated in part by our looming and ever-present credit score.
It can seem like a straightforward storyline, but it’s one that leaves many in peril, including those too young to have built credit or too new to the country, as well as those with personal challenges like job losses, divorces, illnesses, a history of poverty, or simply a few bad financial decisions. Without a healthy credit score, they can be especially vulnerable to predatory lenders or have limited access to housing in Miami’s tight rental market. Those of us with no credit can be stuck with few options outside of asking credit-worthy friends and family to expose themselves to the risk of cosigning our loans or leases. And those of us with bad credit history are often denied access to loans altogether or charged steep interest rates, costing thousands of extra dollars over the life of the loan.
The lending circle lifeline
Lending circles can provide a socially responsible way for people to help themselves get better, and in communities across the developing world especially they can serve as a financial lifeline. While lending circles have been around for centuries, it’s only recently that financial institutions in the U.S, have started catching on to their viability as financial instruments. Lending circles are now being recognized by both financial institutions and credit reporting agencies, an unprecedented development that can help members build or rebuild credit, giving them access to new levels of financial freedom.
Here’s how it works. Let’s say we have 10 people who each want to borrow $1,000 dollars. Each of these people has their own motivation for the money — pay back a loan, catch up on their bills, build a financial safety net. The group agrees on a set monthly payment that everyone pays, typically ranging from $25 to $200 a month. The term, or length, of the loan is also agreed upon. Once the lending circle starts, the $1,000 is periodically distributed to each member of the lending circle, until everyone has received the money. Every month, someone new gets the pot of money. Everyone, including the person receiving the loan that month, is required to make the monthly payment. This continues until the balance is paid off by each participant. At that point, the lending circle is over. If done through a partnered organization, the payments can be reported to credit reporting agencies, which then use the information as part of each member’s credit history. Successfully paying off a loan like this can make a dramatic positive difference in a person’s credit history.
From informal groups to formal recognition
Organizations around the country have taken notice of their potential for helping financially underserved communities. One of the first to commit to the idea in a big way was the local social services organization Catalyst Miami, which is a program managed by Mission Asset Fund and funded by JP Morgan Chase. With lending circles already popular within immigrant communities around South Florida, Catalyst Miami set out to bridge the divide between these informal communities and formal banking institutions, providing a way to have a lasting impact beyond the life of the loan term.
So far, the organization has launched 5 different cohort groups, with each cohort group consisting of six to 12 people. The number of people in the lending circle defines the length of time for loan repayment. For example, a six-member lending circle would last 6 months, while an 11-member lending circle would last 11 months. The progress of every member is reported to Transunion and Experian, with an Equifax agreement currently in the works.
Cohorts come from all walks of life, each with their own reason for joining. The primary focus of the program is credit repair, but participants have also joined to start building their credit history from scratch. Catalyst Miami has taken an the extra step by providing financial education, ensuring members are in a position to make better financial decisions. Catalyst Miami also has members of each lending circle meet in person at the start of each program. It helps members get to know each other, while also building trust and confidence between members of the group.
Coming together for new possibilities
Darren Liddell leads the lending circle program for Catalyst Miami, managing the day-to-day operations of each lending circle. According to Liddell, there are two major long-term organizational goals driving the future of the program in South Florida.
First, he says Catalyst Miami is working to connect their Lending Circles program to members of other organizations in the community. Second, Liddell is exploring how to create goal-specific lending circles.
For example, a group could consist of members who each want to buy their first car, or are trying to put together the down payment for their first home. Imagine a group of students using a lending circle to cover part of their educational costs while building a good credit history without having to resort to high interest credit cards, or of entrepreneurs coming together to brainstorm new ideas while also raising the seed capital to grow or launch their small business.
Need and limited access to resources often stem innovation. But lending circles are coming together to create new possibilities, all while improving their members’ credit and increasing their prospects for the financial freedom that comes along with it.
Interested in getting involved in a lending circle program? Email Darren Liddell at Catalyst Miami for more information or check us out at www.catalystmiami.org and www.LendingCircles.org.