Lending circles offer no interest and no collateral — here's why millions still use them to bypass banks

With inflation sticking around and the cost of lending and borrowing still on the ascent — coupled with immigration rates rising — more Americans are turning to community crowdfunding to secure a loan.

An emerging channel in the alternative lending market, community crowdfunding — especially rotating savings and credit associations (ROSCA) — enables borrowers to bypass banks, credit unions, and branded digital lending platforms to access cash in a hurry.

Jeff Bezos backs a platform that lets anyone invest in rental homes for as little as $100 — 6 ways to build wealth like a landlord without actually being one

Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake. Here's what it is and 3 simple steps to fix it ASAP

Millionaires under 43 hold only 25% of their wealth in stocks. Here's where their money is actually going

Community-based lending channels aren't solely based in the U.S.; they're expanding overseas, building on centuries of communal funding. A major historical community lending source is the Keh, an ancient Korean-based community lending model that allowed borrowers to borrow directly from local community finance sources, often including friends, neighbors, and even family members as organizational lenders.

Now, centuries later, local community lending groups have organized more tightly and are now typically found at Rotating Savings and Credit Associations (ROSCA), which stand as a thriving component in the larger alternative lending ecosystem.

Overall, the worldwide crowdfunding market is rising. Data from Research and Markets shows crowdfunding has grown from $20.34 billion in 2025 to an estimated $23.82 billion in 2026, representing a compound annual growth rate of 17.1%.

Of that marketplace, debt crowdfunding maintains the largest lending share, comprising 51% of the overall crowdfunding market, resonating with lenders and borrowers who view the channel's predictable repayment terms, fixed interest rates, and relatively clear loan and investment terms as favorable.

"They're a great source of capital, with no interest or profit," Jacob Bayer, a certified financial planner at Jacob Bayer Wealth Management, told Moneywise. "Lending circles have existed among immigrant populations and underserved communities to address the issues created when traditional banking fails."

How has community crowdfunding endured from its Korean Keh origins? Mainly by sticking to a simple and effective script that works, if applied correctly.

Lending circles (ROSCAs) are groups that agree to contribute a fixed monetary amount on a fixed schedule – think 10 people contributing $100 each, with one participant receiving the total amount each round in a scheduled rotation.

Basically, community donors fund borrowers for a worthy cause like a high school sports team's trip out of state or for a new local food bank, with little or no focus on any return on investment. While there are no fees or interest rates charged, there's a regular repayment timeline (usually each month until the debt is fully repaid).

"A lending circle actually provides a behavioral return," Cody Schuiteboer, President and CEO of Best Interest Financial, told Moneywise. "Members of a lending circle are compelled to be disciplined with savings, and the circle allows members to combine their individual but small savings into one big savings pot that is disbursed periodically."

One big potential downside with ROSCAs is that sometimes they work, and sometimes they don't, and it's all based on human emotion, rather than credit scores and risk management.

"With this model, nobody earns a return, and collateral is essentially nonexistent," Bayer said. "What makes lending circles work is social capital. In this model, collateral is your reputation."

The consequences of default are all-too human, including facing your neighbors, family, and church, which can be a stronger enforcement mechanism than credit scores.

"This model works when the group is genuinely small and close, and the group leader is trusted and consistent," Bayer noted. "The model fails when it is beyond close groups of people, when the group is large, and when the group leader mismanages funds or runs off with funds."

On the receiving side, lending circles mostly work best for people with limited or no savings who have a reliable but low-paying job.

"They're a far better alternative to payday loans or other high-interest credit options; and members do not lose their savings," Schuiteboer noted. "Eventually, members need to establish other savings and create a credit history, especially if they intend to purchase a home one day."

There's little doubt that community crowdfunding is on the extreme end of the finance-lending realm, arguably with alternative lending, too. If you think a lending circle loan meets your unique donating needs, ask yourself some tough questions before you sign on the dotted line as a lender.

In particular, Schuiteboer advises asking these queries when meeting with a community crowdfunding group

First things first, what is the financial commitment?

According to your sources, what are the terms on this money pool?

Who pays what and when, and more importantly, who gets paid out, and in what order?

What is your source's history as the facilitator of this type of group? How many of these circles have they run?

How many full cycles have the participants been through?

"If there are no answers to these types of questions, the answer is: Don't enter this financial commitment," Schuiteboer said. "Everything should be transparent and predictable. When circles are well run, they are predictable, and they remain small enough to ensure that you know and trust every participant."

The tax breaks in Trump's 'big beautiful bill' expire after 2028 — and experts say most people won't act in time. What to do before the window closes

Here's the average income of Americans by age in 2026. Are you keeping up or falling behind?

This income fund has paid up to 8.4% in historical returns — here are 4 cash strategies so you can earn more in 2026

Here are the 7 top habits of 'quietly wealthy' Americans. How many do you follow?

This article originally appeared on Moneywise.com under the title: Lending circles offer no interest and no collateral — here's why millions still use them to bypass banks

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.