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I got into an argument with a family member about a loaning mechanism they and their friends are using. They detailed it this way: in a group of 5, every member submits $200 to a safe keeper in the group (including the safe keeper themselves) monthly, then each month and based on a simple rotation, one member will get the entire sum of $1000.

They argued that it's totally legal, and has a much-needed benefit of getting that big cash inflow once every 5 months which can help organize your spending. They also mentioned that it can act out as a zero-interest loan.

I argued on the other hand that:

  • It's not that useful to get only $1000 once every 5 months as I can easily save that up myself in the comfort of my wardrobe; so it won't serve me a lot as a zero interest loan and as the loan amount itself.

  • I also argued that raising the pooled amount to something like $1000 per member would result in more risks for the safe keeper to save that money and for every member to be willing to give that amount. The same can be said about increasing the number of members as that will increase the rotation cycle and make the whole thing very unappealing.

So my question here is does this act of funds pooling has a name already? And seeing the arguments made above, does it make sense to be part of it or even multiple groups like that at the same time?

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  • Is the $1000 loaned to a member each 5-month period, or given? It sounds like each member will contribute 200/mo, then get that same 1000 back at the 5 month mark, then repeat (with some members getting the first 1k before contributing a full 1k). So if it is a loan, they are paying $1000 up-front for the privilege of then borrowing $1000.
    – yoozer8
    Sep 2, 2022 at 14:15
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    It strikes me as something that is not useful if you can manage your own savings, as you said. There's not a lot of financial benefit. However... for people who are not so good with money, I can see it forcing them to stick to their savings plan as well as being a bit of fun.
    – user253751
    Sep 2, 2022 at 14:17
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    As long as everyone behaves themselves, the worst you can call it is harmless. The first time someone is late paying back the loan, the friendships are going to be severely strained.
    – keshlam
    Sep 5, 2022 at 3:25

1 Answer 1

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This is called a rotating savings and credit association (ROSCA).

Further reading:

Related question on this site: Is money rotation a profitable game?

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