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Mabuhay! The Filipino community in Canada is close-knit and the third biggest immigrant group in Canada. When it comes to newcomer finances, the Filipino community has an incredible soso (paluwagan) system that they integrate here in Canada.

In fact, a soso can mean a lot of money. It doesn’t replace a personal loan, but can help participants afford big purchases. 

Let’s examine the key similarities and differences between a soso (paluwagan) and a personal loan in Canada.

What Is A Paluwagan or a Rotating Savings and Credit Association?

A soso (paluwagan) is like a rotating savings and credit association (ROSCA). ROSCAs are not just a feature of the Filipino immigrant community. In fact, African-Canadian, Caribbean-Canadian and other newcomers practice ROSCAs as well. 

When low-income or immigrant communities cannot get traditional financing or are underbanked, they can rely on ROSCAs to get them the finances they need. There is no interest charged, so it is also halal.

Financial collectiveness is part of the immigrant experience in Canada and elsewhere. 

How Does A Paluwagan Work?

It is a very simple concept based on trust and community social leverage. A group of people create a closed group.

They each agree to contribute a defined amount every month. Each month, another person in the group is allowed to withdraw all the funds. 

Let’s say 10 friends are in a group. Every month each person contributes $1,000. That means that every month, the group savings account balance is $10,000. 

Each month, a different designated member of the group can withdraw $10,000. Once everyone has their turn, the cycle restarts.

A soso (paluwagan) can be every week, and the amounts can be small. Even if you contribute $50 a week in a 5 person group, that means you get $250 at payout. That is $250 every 5 weeks, or roughly once a month.

Paluwagan Is Based On Rules, Trust, and Consistency

One of the Paluwagan members can act as the treasurer to make sure that all deposits are made and that the right person withdrawals each month.

It requires self-discipline, or consistency, to contribute the money each month. Much like paying down debt or a loan, the same amount of money has to go into the shared account consistently.

What Is The Difference Between A Paluwagan And A Loan?

A soso (paluwagan) is pooled community-savings. You contribute your defined contribution and get the lump sum payout at a designated time in the cycle. 

If there are 12 people in the paluwagan that pays monthly, your lump sum payout happens once a year. There is no interest rate charged to the amount of money in the savings plan.

In contrast, a personal loan gives you a lump sum at the beginning. You have the money immediately. The relationship is 1:1, between the lender and the borrower. 

You spend the next defined period paying back the lender the amount you borrowed plus interest on the total loan.

If you need cash when you are not eligible to receive the lump sum payment, you can take out a personal loan and repay it when you receive your soso (paluwagan) payout.

Is A Paluwagan Legal In The Same Way As A Loan?

You can, and should, make a written document that outlines the roles and responsibilities, frequency, amount, etc. for the soso. Each member has to sign it and get a copy. That is a simple contract. 

If you want to get a lawyer involved, that is fine.

But if someone in the soso (paluwagan) doesn’t make their contribution, the rest of the group has to react. You cannot force a change. 

Of course, the soso relies on the tightness and influence of the group. This way, social pressure is effective.

In terms of a loan, there are laws and regulations in place to protect the lender and the borrower. 

A loan is a legal contract. The federal government, provincial governments, and industry regulators like the Office of the Superintendent of Financial Institutions (OFSI) put in protections for all involved. 

If you don’t pay your loan in Canada, the lender has legal ways to get you to repay it. It can be: 

  • Selling the debt to a collection agency
  • Sue you for the debt owing or more
  • Seize the asset you used to get a secured loan
  • Require you to pay back the loan in full if you miss a payment.

Of course, as a borrower, you have legal protections too. A federally regulated financial institution cannot harass you at home or at work, or to share information about you other than what you agree to or in very specific circumstances.

Your friends? They don’t have any such limits.

Qualification criteria

To qualify for a loan, the lender asks for identifying information. They have to look into your financial history to decide if they think that you are going to be able to service your debt.

It is a risk. They often need your legal name, social insurance number, banking and other information. 

The reason is that they don’t really know you. If you apply online or in-person, you are still a stranger to them.

Some lenders need proof that you have a minimum monthly income. If you are asking for an online loan, you need to show that you have a Canadian bank account. That is so that the lender can deposit the funds there.

A soso (paluwagan) is less stringent. First, you are known to the group. Second, you have a source of income but you don’t necessarily need a minimum income to join.

Third, you might need a bank account if the soso (paluwagan) is done through electronic funds transfers

No Collateral

The great thing about a soso (paluwagan) is that you get the payout even if you don’t have any collateral. You pay each cycle into the fund. Your only collateral is a source of income and a social group.

Many people look for no-collateral loans, also know as unsecured loans. Usually, they charge a higher interest rate. 

No Interest To Pay With A Soso

A soso (paluwagan) is a rotating payout. You are never borrowing money. If you leave your payout in your account, you might actually make interest.

A loan is different. You are borrowing money with the intent to pay it back. Sure, some loans charge very low interest rates, like Windmill Microlending. Others charge interest based on the current prime rate and how risky the lender thinks a loan will be. The risk is a mix of things like your income, debt, and credit score.

Credit Building

A soso (paluwagan) cannot help build a credit history, and thereby a credit score, in Canada. It is not a traditional loan from a registered institution with a repayment schedule, there is nothing to report to either Equifax or Transunion.

Unless you use Nova Credit, your credit rating from another country does not follow you to Canada. So, to build your Canadian credit history and credit score, you still need to apply for traditional financial products like credit cards, personal loans, or mortgages.

Of course, you can build your credit score with other financial products like secured credit cards and credit-builder loans.

However, a good credit score relies on timely debt repayments and requires the same consistency as contributing each month to a soso.

If you want to know your personal credit score, you can check it for free at Compare Hub.

Who Is Paluwagan Good For?

Paluwagan is good for the unbanked, underbanked, those with little to no collateral and immigrant communities up to a certain point. So-called credit invisible adults in Canada – 3 million of them – can use a ROSCA or soso (paluwagan) to meet planned expenses. 

Furthermore, a planned expense includes loan repayment. You can use your soso (paluwagan) payout to repay your loan.

An on-time repayment will help build or potentially improve your credit history. However, if you have an unexpected cost and no emergency savings, a loan is a reliable, time-sensitive

Soso (Paluwagan) and Personal Loans in Canada- FAQs

Is a soso (paluwagan) halal?
A soso (paluwagan) is savings and not a traditional loan. There is no interest charged or paid. Since halal financing forbids charging interest, then a soso conforms to it.
Do I have to tell my Canadian bank about a soso (paluwagan) in Canada?
If you have a Canadian bank account and you deposit and receive the contributions by electronic funds transfer (eft), your bank might want to know what is going on. Once they know, there should be no issue.
Can a soso (paluwagan) build my credit score in Canada?
No. If you have a credit score outside of Canada, companies like Nova Credit can help bring it to Canada. Otherwise, you can use loans, credit cards, secured cards, mortgages and other credit products to build your credit history and credit score in Canada.
Who are the biggest immigrant groups in Canada right now?
According to Statistics Canada, the most immigrants coming to Canada are from India, China, and the Philippines.
Stefani Balinsky avatar on Loans Canada
Stefani Balinsky

Stefani Balinsky is the Head of Content Strategy at Loans Canada. Her work and her commentary have appeared in major media including the Toronto Star, Financial Post, and Bell Media. She is a creative and analytical thinker with a way with words. Direct, empathetic and funny, she makes convincing and coherent sense out of complex ideas. She has many years of leadership experience in marketing, writing, mentoring, and fintech.

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