A tanda is a traditional group savings method that brings together a community to pool their resources and help each member access a lump sum of money at a scheduled time. This informal finance system is also referred to as a lending circle, and is commonly used in various cultures around the world, especially in Latin America and parts of Asia.
In this article, we’ll explore what a tanda is and how it works. We’ll dive into its basic concept, provide examples of how tandas operate, and weigh their pros and cons.
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What is a tanda?
The term tanda in English means “a series” or “a group,” and it can also be called “susus” or “chit funds” in other places. It comes from Mexico and reflects the structured nature of the system, where participants come together in a group to save and share funds.
At its core, a tanda is a cooperative savings plan where a group of individuals agree to contribute a fixed amount of money into a communal fund on a regular basis. The funds collected are then distributed to one member of the group at a predetermined time, often on a rotating basis. This process continues until every member has received their payout.
Each member might join a tanda to save for a significant purchase, such as a home or a vehicle, or to cover unexpected expenses. In many cases, tandas are used to fund personal or family events, such as weddings or education.
Tandas work on the principles of mutual trust and cooperation, with the primary goal of helping members access larger sums of money when needed, without relying on traditional loans or credit.
Tandas have deep cultural roots in Latin American communities and are a testament to the power of collective effort in managing finances. They represent a traditional approach to saving and borrowing, rooted in community solidarity and informal financial practices.
How does a tanda work?
The basic structure of a tanda involves a group of participants who come together to pool their resources and provide financial support to one another. Here’s a breakdown of how a tanda typically works:
- Participants: A tanda generally consists of a fixed number of participants, often ranging from five to 20. Each member agrees to contribute a set amount of money to the communal pot at regular intervals, such as weekly or monthly.
- Contributions: Each participant makes contributions of the same amount and on the same schedule.
- Distributions: The money collected is distributed to one participant at a time, based on a predetermined schedule. This rotation continues until every participant has received their payout. For instance, in a monthly tanda, the first participant might receive the lump sum in the first month, the second participant in the second month, and so on.
- Role of the coordinator: Often, a coordinator or organizer manages the tanda. This person ensures that contributions are collected, funds are distributed, and the schedule is followed. They also handle any disputes or issues that arise among participants.
Example
Imagine a group of eight friends who decide to form a tanda to save for a vacation trip. They agree to contribute $200 every month for eight months. At the end of each month, each participant contributes $200, resulting in a total pooled amount of $1,600. The group has agreed on a rotation schedule where the payout each month goes to a different participant.
In the first month, the first participant receives $1,600. In the second month, the second participant receives the full amount, and this continues until all eight participants have received their payout. By the end of the eight months, each participant has received $1,600, and the tanda is complete.
Pros and cons of a tanda
While tandas offer a unique way to save and access funds through community collaboration, they also come with certain risks and challenges that participants should carefully consider.
Advantages
- Community and social benefits: Tandas are often built on personal relationships, where participants rely on mutual trust to contribute and distribute funds. This communal approach strengthens social ties and provides financial support within the group, particularly in cultures or communities where formal banking services may be less accessible.
- Easy access to funds: Tandas offer participants the ability to access larger sums of money without needing to navigate formal banking systems. This can be especially beneficial for individuals who lack access to traditional loans or credit. By pooling resources, members can receive lump sums that they can use for significant expenses, such as medical bills, education, or starting a small business, without the need for collateral or credit checks.
- Low or no interest: Unlike formal loans or credit lines, participating in a tanda usually doesn't involve paying interest. Members contribute a fixed amount regularly, and when it's their turn to receive the pooled funds, they get the full amount without any interest deductions. This makes tandas an appealing option for those looking to save or access funds without the added burden of interest payments.
Disadvantages
- Risk of default: One of the major risks associated with tandas is the possibility that a participant may fail to contribute their agreed-upon share. If a member defaults, it can disrupt the entire cycle and leave others in the group short of funds. Since tandas are often based on trust rather than legal agreements, recovering the money can be challenging if someone fails to uphold their commitment.
- Lack of regulation: Tandas operate outside of formal financial systems and are not subject to the same regulations and protections as banks or credit unions. This lack of regulation means there's no legal recourse if disputes arise or if a participant fails to contribute. Participants must rely on personal trust and community norms to ensure everyone fulfills their obligations, which can be risky, especially in larger groups or with members who are less familiar with each other.
- Potential for conflict: Disagreements among participants can arise in a tanda, particularly if there are disputes over the order of payouts, missed contributions, or perceived unfairness. These conflicts can strain relationships and create tension within the group. Without formal dispute resolution mechanisms, resolving such issues can be difficult and may even lead to the dissolution of the tanda.
Are tandas legal?
The legality of tandas varies depending on the country and its financial regulations. In countries like Mexico, where tandas are deeply rooted in cultural practices, they are widely accepted and legally permissible. However, in some countries, especially those with strict financial regulations, tandas might be scrutinized more closely. For instance, in the U.S., tandas are legal as long as they don’t resemble or operate like a pyramid scheme, which is illegal.
It’s worth noting that while tandas themselves might be legal, the lack of formal oversight means they carry certain risks. One of the key regulatory concerns with tandas is the potential for fraud or default, as there is no formal legal recourse if a participant fails to meet their obligations.
Additionally, in the U.S., there may be tax implications for large sums of money received through a tanda. Such transactions could potentially be subject to taxation, and participants might be required to report them as income.
Alternatives to tandas
While tandas provide a unique and culturally significant way to save and access funds, several formal alternatives offer similar benefits with added security and potential for growth.
Formal savings accounts
Traditional savings accounts are a secure and regulated alternative to tandas. These accounts allow individuals to save money with the assurance that their funds are protected by government insurance (such as FDIC). Additionally, savings accounts typically earn interest, providing a small return on deposited funds. Unlike tandas, savings accounts don't rely on group trust, reducing the risk of default.
Credit unions
Credit unions are member-owned financial cooperatives that offer a range of banking services, including savings accounts and loans, often with better rates than traditional banks. Like tandas, credit unions emphasize community and shared benefits, but they provide the added security of regulation and oversight. Members can save collectively, earn interest, and access loans with lower interest rates, all within a more formal and secure framework.
Investment clubs
For those looking to pool resources with a group for investment purposes, investment clubs may be a strong alternative to tandas. In an investment club, members contribute funds regularly to a collective pool, which is then invested in stocks, bonds, real estate, or other assets.
Unlike tandas, which typically involve saving and distributing funds, investment clubs focus on growing the collective wealth of the group through strategic investments. This option offers the potential for higher returns, though it also comes with higher risks.
Bottom line
Tandas offer a unique way to save and access funds within a community, providing both financial and social benefits. However, they come with risks, including the potential for default and lack of regulation.
Before participating, weigh the pros and cons, consider legal implications, and explore alternative savings options that might offer more security and flexibility. Whether you're considering a traditional tanda or an online version, understanding how they work and the risks involved is crucial for making informed financial decisions.