A lending club is a pretty simple concept. You get a group of people together, all contribute a certain amount of money to a pot every month (or whatever your designated period is,) and then every month a different person gets the pot. For the people who get the money at the beginning, it’s like a non-interest bearing loan. For the people who get the money at the end, it’s like a non-interest bearing savings account. For everyone in the middle, it’s a mixture of both.
While lending clubs are a relatively new phenomenon in this country, they’ve been around elsewhere for a while. Most notably, the Caribbean. In the states they’re most commonly known as sou-sous, a term which originated in West Africa and then migrated to Trinidad. In Mexico and Central America they’re known as tandas or cundinas. Ask a Jamaican and they’ll tell you they’re called partners. They’re even found in the eastern hemisphere, known as gye in South Korea and hui in China.
We see them in the states mostly among immigrant populations. A major part of that is cultural. Another part, however, is that if you don’t have any credit or are not legal, things like a bank account or loan can be impossible to obtain. It seems to me there’s a whole bunch of people these organizations could be good for, though. You may want to join/start a lending club if…
…you cannot get access to credit/a bank loan. There are many people who have this issue, even if they are native-born citizens. A rocky financial past usually predicates this predicament.
…you are one of those people that need accountability to reach your goals. A common question asked in a sou-sou is, “What are you saving for?” There is a lot of excitement around everyone’s goals, and the fact that other people are relying on and expecting you to pay your monthly dues may just be the motivation you need to get your saving done.
…you have people you trust. Traditionally, at least in populations from Trinidad, things are run within families. In large families that are close knit, it’s more difficult for someone to just run with the money or not pay their dues.
When I came across this subject, I thought it was incredibly interesting, and hoped that perhaps someday there was a way to track and report the activities of these lending clubs so that people without credit could have it built. They may not be for everybody, though. There are a couple of arguments that should not be ignored:
- They don’t build interest. While if you’re the initial recipient of the money, you’re getting an interest free loan, if you’re the last person on the list you’re essentially just using a savings account that bears no interest. If you can put $50 aside every month in a bank, this would be a much higher yield option.
- Sometimes the organizers charge a fee. There is generally one person in charge of collecting and holding the money every month. In some clubs, they will charge fee for their services. So even though you have 8 people in your club that pay $50 every month, the pot will only be $350 rather than $400. (That’s just an example.) If you were saving $50/month cash by yourself, you’d have $400 by the end of the same time period, without paying someone else to help you save it.
- You really could do this by yourself. If you’re not the kind of person who needs accountability to others to motivate you, you could just set aside the $50/month by yourself. Even if you don’t qualify for a bank account. Doing it yourself also means no worries about others shirking their responsibilities to you.
- You don’t want to get mixed up with the wrong people. While there is a concern that someone could run off with the pot, I would imagine there’s also a concern about WHO you are being held accountable to. Are they scary? If you miss out on a payment are you going to end up with a broken arm? Traditionally this isn’t the case if you’re participating with family, but it’s something to be aware of if you’re participating or organizing your own with people who are non-native to the cultural tradition.
Have any of you ever participated in a lending club? Would you?