SAN FRANCISCO (CBS SF) — A traditional form of peer-to-peer lending that’s been practiced in other countries for centuries is helping Californians meet their financial goals – and build credit at the same time.

It’s known as a Lending Circle and non-profit organizations in California are now offering versions that include added protections and benefits.

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Three years ago, Shweta Kohli of San Francisco joined a Lending Circle organized by the Mission Asset Fund,  a non-profit dedicated to helping un-banked and under-banked individuals.    Kohli’s intention was to buy a used car,  and she didn’t like the idea of a high-interest bank loan. “Anything I buy,  I want to pay cash for it,”  she told Consumerwatch.

Every month,  Kohli and eleven other participants of the circle chipped in $100.  All the money collected each month was distributed to one member of the circle,  as a no-interest loan.   When Kohli’s turn came in October,  it was her turn to collect the full amount.   It was an idea Kohli was familiar with because her parents who were born in India,  had used lending circles.   “My dad did one with his colleagues at work,”  she said.  “Probably to finance my education.”

“It was crowdfunding before there was crowdfunding,”  according to Jose Quinonez of the Mission Asset Fund.   “Immigrants have a really rich tradition of coming together, lending money to each other.”

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But his organization’s Lending Circles have more structure than those organized solely by borrowers.   “We’re formalizing it by having them sign a promissory note and agreeing for us to service the loan for them,”  Quinonez explained.  And unlike loans arranged by peers,  Lending Circle transactions overseen by Mission Asset Fund are reported to credit bureaus enabling participants to build a credit score.   “We are helping people build financial stability.”

Quinonez says the default rate is less than one percent,  far lower than traditional loans from banks.

And the idea is taking off.  California recently became the first state in the country to make it legal for non-profits to offer small no-interest, no fee loans.  “This is really historic because it’s the first time that any government has recognized lending circles and credit building loans,”  Quinonez said.

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Kohli is sold on the idea.   After kicking up her monthly contribution to $300, she was able to purchase a used Mustang for $3,600 in cash after just one year in the program.  And even better:  “I have a car that I don’t have to make payments on.”