Credit-damaged middle-income drawn to lending circles
Lending circles are moving upmarket.
An age-old cultural fixture across the world — they’re known as “cestas” in Latin America and “susus” in Africa — the informal banking systems increasingly are getting attention from middle-income consumers in northern Nevada.
The attraction: A formally structured lending circle helps consumers rebuild credit ratings that were hammered during the recession.
Members of a lending circle — typically, about a half dozen people — make a monthly contribution into a common pool. Each month, one of the members receives the total of the pool.
A six-person pool with monthly contributions of $50, for instance, would pay out $300 to one member the first month, $300 to the next member in the second month and so on. At the end of six months, each participant would have contributed and received $300.
Lending circles long have been popular in communities with mistrust of banks or among consumers who struggle to accumulate savings. During the past 18 months, they’ve gained a solid foothold among participants in programs developed by the Financial Guidance Center in Reno, and the center now is looking to expand them to include college students as well as middle- and upper-income consumers.
In the past two years, more than 130 consumers have participated in 22 lending circles organized by Financial Guidance Center.
The northern Nevada program relies on a twist on traditional lending circles that’s been launched by a San Francisco nonprofit. It removes the biggest risk of a lending circle — the possibility that the group member holding the pool will abscond with the money.
Instead the nonprofit Mission Asset Fund provides the back-office support for lending circles, collecting the money, holding it and paying it out.
Jill Perry, who directs the northern Nevada operation of Financial Guidance Center, says the lending circles that her organization operates with the support of Mission Asset Fund also require participants to get a bank account. About half the participants, Perry says, come from the 6 percent of the region’s households who don’t have any bank accounts.
A big attraction is the power of lending circles to improve consumers’ credit scores.
Perry says Financial Guidance Center reports lending-circle activity to credit bureaus, which tally the activity as borrowing and repayment.
Participants typically are seeing 30-, 35- or even 50-point increases in credit scores .
“It’s a huge, simple way of building your credit,” Perry says.
In Washoe County, in which 61 percent of households — rich and poor alike — have subprime credit scores, initiatives to boost creditworthiness get lots of attention.
That includes, Perry says, attention from middle- and upper-income folks.
“The economy has caused the middle class to have a financial crisis,” she says. “A lot of them are recovering, but the damage to their credit ratings has been done.”
But the Financial Guidance Center hasn’t been able to move quickly to serve the middle class. Most of its funding comes from grants from organizations such as that target lower- and moderate-income families. Charles Schwab Bank, for instance, provides funds to Mission Asset Fund and Financial Guidance Center to bring lending circles to northern Nevada.
Given the limitation of most grants, Financial Guidance Center hasn’t figured out a way to offer free lending circles to higher-income families.
Instead, Perry says, the center is close to launching a program in which higher-income participants would pay a small fee that would cover the operation of their participation in a lending circle.
At the same time, the center already is launching lending-circle programs that target college students in the Reno area, helping them build credit and avoid some of the traps of over-reliance on credit cards.
Perry has been surprised at the careful strategic decisions made by participants in lending circles.
Some, for instance, use their share of the money to pay off payday loans.
Others collect their funds, leave the money on deposit in a bank account, and use the account to back a low-cost secured credit card. Use of the credit card, in turn, further bolsters their credit scores.
And some simply time the lending circle payout to give the ready cash for an insurance payment or Christmas expenses.
“People are much more resourceful than we give them credit for,” the financial counselor says.
I took a walk through downtown Reno on a sunny spring Saturday afternoon with an iPhone in hand. Normally, the city would be teeming with gamblers, craft beer enthusiasts, tourists and March Madness watchers. Instead, here’s what I saw.