Two years ago, Javiar Giron went bankrupt. The 46-year-old father of three had been doing fine since he came to the U.S. in 1985: He learned English on the street, bought a house and managed a carpet business. He began buying and selling, or “flipping,” houses on the side, but that tanked with the housing market and he lost two of his properties to banks.
Giron is emerging from the financial hole he spiraled into by participating in a lending circle – a form of peer-to-peer finance – as a way to save money with a no-interest, no-fee microloan and to build up credit. Participants in this age-old technique can be found in states from Massachusetts to California.
“Credit is gold in the U.S.,” Giron says. “You don’t have credit, you don’t have anything.”
Mission Asset Fund
The Mission Asset Fund facilitates Giron’s circle, in which a group of people lend money to one another. The San Francisco-based nonprofit organization known as MAF formalizes a traditionally informal practice partly to keep participants away from payday lenders and other sources of short-term, high-cost credit.
The organization brings together about 10 low- and moderate- income individuals to join a circle. The assembled group collectively decides on the amount to be loaned, say, $1,000. Then the members contribute part of that amount – $100 apiece in this case – to the pool of funds every month, and one gets the full $1,000 each time. By the 10th month, all participants will have received that amount and all the loans will have been totally paid off.
Lending circles help participants raise capital for various expenses: car down payments, debts and small business investments, among other things. But the microloans, which MAF insures, are less about the cash and more about boosting credit scores to give participants access to mainstream financial services.
Learning through lending circles
“Part of it is a process of education, making sure they are budgeting and getting them at a place where they can make good financial decisions,” says Jose Quinonez, MAF’s chief executive officer.
There are no specific requirements to participate in one of the circles, although the organization discourages people whose debt payments consume more than half their income. Those who do join sign contracts through MAF, which guarantees each member will get their money back even if some don’t pay their share to the circle.
“We have sort of like a mini-FDIC insurance to the lending circle,” Quinonez says, referring to the Federal Deposit Insurance Corp., which backs bank deposits. “That guarantee that we provide brings more peace of mind — it gives people assurance that the structure will hold.”
Default rates are less than 1% in MAF circles, partly because of the social responsibility that being in such a group entails. The organization reports all payment information to credit bureaus TransUnion and Experian, so participants can benefit by improving their credit scores.
A circle of lending
Big banks like JPMorgan Chase and Citigroup help MAF with grants and contributions. They share its goal of helping borrowers to eventually attain healthy credit scores so they can get loans from traditional lenders.
“We are definitely creating a consumer good,” Quinonez says. “The people benefitting from our work are banks because we are expanding the pool of eligible borrowers.” Since its founding in 2007, MAF has helped thousands of borrowers gain access to a total of $3 million in social loans.
Shweta Kohli, 33, says her credit score has improved more than 120 points since she started saving through MAF three years ago. Even though her credit is strong enough to have accounts at Citibank and two local credit unions, she still participates in lending circles and doesn’t see herself stopping anytime soon. Kohli enjoys the guidance she gets from MAF as she strives to open a retro-style Indian fusion café in San Francisco.
“They will help you find the right loan to go with, the right application process to go with, the right answers to say to a loan officer for a small business,” she says.
A traditional technique
Informal lending circles have been around for centuries, embedded in cultures worldwide. They’re known as tandas, cuninhas, hui and pandeiros, depending where you go. Familiarity with the lending circle concept is part of what helps MAF successfully serve participants, particularly immigrants.
“I know about tandas,” Giron says. “I remember my mom in Mexico used it to buy clothes for my five brothers and five sisters and I.”
Specific MAF lending circles support immigrants saving the $680 needed to apply for U.S. citizenship or the $465 application fee for temporary resident status under the Deferred Action for Childhood Arrivals (DACA) program, which provides work permits and protection from deportation to young immigrants.
Jessica Guerrero, 22, joined MAF’s Lending Circle for Dreamers program in 2012 to cover a DACA fee. At the time, she was waiting tables to pay for her San Francisco State University tuition, rent, food and transportation, all completely out of pocket. Like Giron, Guerrero was familiar with tandas from her Mexican heritage.
“I thought, ‘OK, I won’t be able to pay $500 in just one month just like that; I don’t have that kind of income,’” she says, referring to the DACA application fee.
Guerrero also appreciates the financial education that MAF provides, including online tutorials about savings and checking accounts, credit, mortgages and financial-management classes.
“The community in this area has no knowledge – there’s no financial education whatsoever, and that’s a huge problem,” Guerrero says. “We’re just living day by day, surviving.”
Spreading the circles
Research has shown that MAF’s lending circles are successful. Participants increased their credit scores by an average of 163 points and decreased their outstanding debt by more than $1,000, according to a 2013 study by researchers at San Francisco State University.
The formalized lending circle technique has spread through MAF to more than 27 nonprofit organizations in 11 states, including California, Oregon, Nevada, Washington, Minnesota and Massachusetts. Additionally, Yattos, a San-Francisco-based company, offers similar models online that let people form circles or connect with friends to get interest-free microloans and save cash.
Guerrero spread the word about lending circles within her own community, including to her mom, who recently joined one to start saving for a car and building credit.
“Where I’m going to school I have many resources,” Guerrero says, reflecting on how she’s helping others connect to MAF’s credit-building opportunities. “People that I meet, or that I know – family and friends – they don’t have that opportunity that I’ve made for myself, so now I’m able to plug people in.”
All hands photo via Shutterstock.