It is but your typical ‘noninterest’ save-and-borrow system – a paluwagan! Yes, I just signed up for another reassuring semester-long paluwagan with nine other faculty colleagues. As we agreed upon, contributions will start with our first paycheck in mid-June, and which individual redemptions of pooled savings of PHP5,000.00 shall run bimonthly till the last of October. Seventh in the queue, I’ll have an extra saved for something bigger. I’ll share it here soon I have my payout.
To tell the truth, it marks my second paluwagan experience, the first way back 2015 and but a big regret as I lost around a thousand pesos because of the inefficient collection and a member who left at the middle of the school year. Nonetheless, I’m still more willing to give paluwagan another try. After all, it’s a different group, now among really financially-savvy folks.
Hi there! In this article, I’ll walk you through everything you should know before engaging in a paluwagan – its concept, structure, advantages and disadvantages, among others. Anyway, the concept of paluwagan has been around since time immemorial, and you can take this article as a revisit or critical examination. Take time then going slow with the sections and feel free to click the icons on the side to share to your friends and colleagues.
Paluwagan: Definition and English Counterpart
Paluwagan, which literally means ‘easing up,’ is a traditional Filipino practice of pooling savings funds common among close friends and colleagues with the purpose of saving and making a lump sum for certain financial goals such as bigger purchases at the time of scheduled redemption or payout.
It is an informal money-lending scheme or save-and-borrow mechanism almost universal as it exists in many societies, east and west. The Filipino term ‘paluwagan’ has a formal counterpart in English (or its English translation) – rotating savings and credit association or ROSCA.
More than just a financial commitment, a paluwagan also entails shared savings goals, hence the spirit of ‘bayanihan’ among participating members who usually struggle making regular savings for specific purposes from their monthly paychecks.
It builds but a mutual trust within a stronger social and financial network when sustained, but may also cause disputes and ruin relationships most especially when members fail to settle their financial obligations, hence the common issues of delinquent contributions and members leaving the network after their early redemptions –all which are discussed in the succeeding sections.
How Paluwagan System Works
As stated earlier, a traditional paluwagan works exactly the same as its English counterpart rotating savings and credit association (ROSCA). With at least three members who voluntarily participate based on trust and genuine commitment to a shared savings goal, a paluwagan can already be formed.
Normally, all members of a paluwagan contribute a fixed amount at regular intervals to a common purse while a member takes the whole sum once at each pooling schedule. The cycle continues until the last member in the lineup redeems his due sum, and hence, the cessation of the paluwagan term.
Upon voluntary participation however, all paluwagan members should decide and agree upon four important conditions – fixed rate of contributions, schedules of remittance and redemption, lineup of redemption, and a credible person to collect contributions.
Advantages of Paluwagan (ROSCA)
1| It cultivates a disciplined habit of saving. Say, you can’t really make a regular savings from your monthly or bimonthly paycheck. Then, a paluwagan can be your best resolve. It forces you to secure a regular stash. Yes, saving is a personal thing, but can also work well and more fun when this goal is shared with others while building stronger social and financial networks. In this way, it becomes more of a personal and social responsibility.
2| It enables an access to a lump sum of money. Whether you need a large sum of money for your grad school enrollment or for your gadget purchase, a paluwagan can give you an instant fund. You just have to wait for your schedule of savings redemption or payout, or even if unexpected expenses come earlier, you can always ask other members for a schedule switch.
3| It protects individual savings against immediate consumption. Another good thing about a paluwagan, you keep your savings in a common purse until your redemption schedule, and this gives you a shield against impulsive buying and splurging. While you’re on the wait for your payout, you have enough time to think about the best thing to do with your lump sum.
4| With a shared risk, it pressures all members to make on-time contributions. While all members have expressed their commitment to savings, you are also but driven to comply with agreed payment conditions. It is understood hence that if somebody fails to make contributions on time, then all members are affected. Of course, nobody wants the worst.
5| It promotes a sense of ‘bayanihan’ and shared financial goals. It strengthens social and financial network through a communal unity, work, and cooperation. All paluwagan members voluntarily participate and share the same financial goal – to make regular savings and enjoy their ‘sahod’ at the right time or the scheduled redemption. It’s indeed a Filipino way!
Disadvantages of Paluwagan (ROSCA)
1| It is informal and unregulated. It does not require any contracts and licenses, rather common verbal agreement among participating members. It is not regulated by any governmental body. If any member denies redemption of a lump sum and refuses to pay contributions resulting in the loss of others down the line, it is impossible to make legal claims.
2| It does not earn any interest. It is not a form of investment, and hence, your money does not earn any interest. Although there are other forms of paluwagan wherein funds are lent for interests, a common system in the Philippines is purely for the purpose of making savings. If you want your hard-earned money to grow even a little, then don’t put it in a paluwagan.
3| It is highly susceptible to swindling. You’ve heard of paluwagan members being scammed by their collector, haven’t you? Since it is highly informal and unregulated, there is a high risk of ending up empty-handed while the collector runs away with your money. You don’t know when and how greed takes over a person, even if he’s your close friend or colleague.
4| It usually results in delinquent payments of early-redeeming members. It opens a door for opportunists who exploit circumstances and their ‘draw lots’ luck to gain immediate financial advantage. They are those who have spent their lump sum at the early stage of the cycle and soon simply get lazy making succeeding contributions for the benefit of the rest.
5| It leads to trust issues and broken relationships. Imagine how it feels being deceived and betrayed. If the paluwagan system fails, and you lose your hard-earned money, then your relationship with the culprit will be greatly affected, unless he runs away with the money. If the latter is the case, then it will cost you even more stress and ‘sama ng loob.’
Truly, a paluwagan poses many advantages and disadvantages. It can be advantageous especially when you struggle making a regular stash of savings from your paycheck and when you need a lump sum of money for bigger financial goals. However, it can also be disadvantageous as it may result in losing your savings to uncommitted and unscrupulous members. In the end, it is still you who hold the final decision whether to give a paluwagan a try or not. Try to weigh things out!
Online Paluwagan Advisory
Online Paluwagan is but another fraudulent scheme or a scam made through online platforms such as Facebook groups or websites. It involves a scheduled collection of money from each member by one or few administrators with a promise to distribute the funds with additional interests to all members on their respective payout schedules.
The Philippine Securities and Exchange Commission has recently warned the investing public against online paluwagan saying that such investment solicitations are illegal as they are not registered with the commission. Many members who have fallen prey have already reported huge losses while operators remain unable to refund investments. It is however advised that you check and verify SEC registrations of these online paluwagan operations. You better be informed about it!