Money Crashers: Lending Circle – What It Is and How to Borrow From a Group Fund

In my latest piece for Money Crashers, I talk about an interesting way to borrow money: lending circles. These are informal groups in which members take turns pooling funds and giving all the cash to one person. For instance, ten people each put in $100 every month, and one person gets $1,000. Each person gets a turn to borrow, so everyone comes out even. And, since everyone is both a borrower and a lender, no one has to pay interest.

Now, if you're paying attention, you may have spotted a weakness in this plan. If you put in $100 every month, and once every ten months you collect $1,000, then you haven't really gained anything. You're no better off than if you had put that same $100 in the bank and withdrawn $1,000 after ten months. In fact, you're a little worse off, since banks pay at least a tiny amount of interest on your savings.

But the thing is, many people would have trouble saving up that $1,000 if it were just sitting there in the bank. They'd always be tempted to dip into it for emergencies, or to skip the $100 savings deposit some month when money was tight. But if they know the group is counting on them for that $100 payment, they'll do what it takes to make sure they have the money. It's the social pressure that forces them to save. And, since every payment is also an occasion for a social gathering, it's more fun.

Since I don't have trouble keeping my hands off my bank balance, a lending circle wouldn't be much good to me. But for those who do, it can make saving a little easier and more enjoyable.

Lending Circle – What It Is and How to Borrow From a Group Fund