By Sabrina Terry, Project Manager, Wealth-Building Initiative, Economic Policy Project, NCLR
Latino families face significant challenges accessing credit, and not just for big life events like starting a business or buying a home. Small-dollar lines of credit that range from $500 to $1,000 are nearly as difficult to obtain. These small-dollar credit lines play a critical role in a family’s financial security and economic mobility, especially for Latino households who were hardest hit during the recession and their savings were wiped out.
Small-dollar lines of credit help low- to moderate-income families meet their short-term goals and pay for unexpected expenses, like purchasing school books or replacing a set of tires. A small-dollar loan can also be an important bridge for a Latino household that relies on seasonal work for income, when the current month’s hours are fewer than the previous month’s. They can also be a great stepping stone to building a positive credit history, making it easier to access larger lines of credit or get cheaper interest rates in the future.
Despite the many benefits, small-dollar credit options—especially at an affordable rate and without a lot of fees—are few and far between. Many financial institutions do not offer small-dollar loans because the costs and work that go into the small-dollar products outweigh the anticipated profit an institution might receive. Also, not everyone can access the institutions that offer them. Latinos located in rural areas have increased challenges given the large distances to visit a financial institution. Too often, the easily accessible lines of credit are not affordable and in many cases, they are outright predatory. Payday lenders are one of the most well-known examples of a predatory small-dollar lender; their lines of credit come with extreme interest rates reaching up to 400 percent, and the underwriting does not account for a borrower’s ability to repay before making the loan. The current marketplace leaves those in need with little to no options.
Latinos, especially immigrants who are new to credit, face even more barriers such as language, proof of income, and identification. It is because of this dynamic that NCLR is working closely with our partners to connect the Latino community to safe, small-dollar credit, including alternatives like the lending circles provided by NCLR Affiliate Mission Asset Fund partnering with eMoneyPool.
Lending circles are known around the globe as different things, including tanda, cundina, and Susu. Although the names may differ, a lending circle is an informal line of credit where a group of people pool their money (weekly, monthly, or yearly) and borrow to one another to meet their financial goals. For example, a lending circle is formed between 10 people and each member gives $100 every month. Once everyone has paid in at the end of the month, one participant gets the pot of $1,000. This continues for 10 months until each member has received their turn of $1,000. The number of participants, duration, and terms of each pool vary, but the focus of money pools is on small sums usually in the range of $500–$1,000.
Lending circles are a valuable, culturally competent resource for not only saving but building credit. Both eMoneyPool and Mission Asset Fund report their members’ payments to the credit bureaus and help families leverage their ability to save small increments into a wealth-building activity. Luis Cervera, Co-Founder and President of eMoneyPool, believes that lending circles help Latinos reach their financial goals faster because they enforce a discipline of saving within each member of the circle. With technology and credit reporting, both eMoneyPool and Mission Asset Fund have converted a traditional informal lending practice to help borrowers access affordable loans, build credit, and set them up for long-term financial success.
We look forward to connecting the Latino community to these resources as a way to overcome credit access issues. More information on NCLR’s financial inclusion work is available on the our website.