Family Loan Pool

Family Loan Pool

  • Applicant: Smith Family
  • Nationality: African-American
  • Case Type: Family Loan Pool
  • Time: 1-2 Days
  • Challenges:
    1. Members being unwilling to share what their goal for the money is, not fostering trust
    2. Ensuring benefits for the late-receivers of the money
    3. Understanding every member’s concerns and issues ahead of time
    4. Not everyone was present in the country

 

 

 

BACKGROUND

Owning a home while in your mid-twenties seems a bit like a pipe dream in current-day America. However, there are creative solutions to finding the money to do just that. The history of money pools – or social saving, solidarity lending, etc. – is both long and at the same time unfamiliar to many. The concept on the surface is quite simple: a group of people each pay an equal amount into a fund at regular intervals, usually once a year. At each one of these intervals, one member gets all of the money for the fund. At the next interval, the next member of the pool gets the funds, and so on until each member has received the funds an equal amount of times. The benefits are obvious; if there are five members of the pool, and everyone pays 10,000 dollars into the fund each year, the first year Member 1 gets 50,000 dollars, 40,000 of which they would not have had that year. They can use that money to start a business, put a down payment on a home, or to take advantage of any opportunity that a large sum of money is a requirement of. The simplicity of the system gives way to real-world concerns however. When trying to create a money pool, many people run into problems that they did not foresee ahead of time, and when such large sums of money are involved, those problems can be relationship ruining. Thus, when the Smith family came to us asking for a consultation of a money pool agreement, we were happy to help.

 

KEYS TO SUCCESS

The Smith family had seven members who wished to contribute $10,000 each once a year to a loan pool, with the pool payable to a single member once a year, the beginnings of a basic set up. However, even among family members, a key part of money pools is fostering a sense of trust and security among the members. Family may be less susceptible to some of the pitfalls of money pools, such as members bailing on the pool after they’ve received their cash or failing to pay in the first place, but that doesn’t mean that these things shouldn’t be thought about or they cant be factors taken into account in a written document accompanying the money pool.

Beyond the regular pitfalls of money pools, members of the Smith family were not forthcoming with the details about why they wanted to join the pool. Some of the members were very forthcoming about their goals; more than one of the members wanted the money to put down payments on a home. Other members were far less free with the details of why they wanted to join, which caused some friction with the other members. When dealing with large sums of money, any seeming lack of transparency can set off alarm bells for people. However, in this case, the members who didn’t want to discuss what they wanted the money for simply came from a different set of cultural expectations than the group who were willing to discuss what they wanted the money for. Even among families, something as simple as being from a different generation than others in your money pool is going to change how you view talking about money.

“Writing these contracts and agreements isn’t just about putting things down in writing, anyone can do that. They want to know how to make it better than the basic loan pool, which is something we can do. This isn’t a form you can just download from online. People who do this don’t know what they don’t know, they don’t know what problems might run it to, from legitimizing the money to banks or protecting it from being overtaxed. We can help with all of that. In this case, three of the members have already put down payments on homes using the money from this pool. ” – Joseph Tsang, Attorney

Ensuring that the people who receive the money later down the line have enough benefits to pay $10,000 into a fund each year is a crucial part of the process. The last person to receive the money has paid $10,000 seven times and they receive $70,000 for their efforts. If that person had merely kept their money in a savings account that whole time, they’d have more money than that, so the last person, usually the last few people in the pool, generally need an extra incentive to agree to the pool. Sometimes that means they receive interest that the pool generates when it is in holding, sometimes that means that the other members agree to provide services to that member at a later date. In this case, the later members of the pool were provided services, such as free website design and free babysitting.

The last piece of the puzzle was ensuring the families of all the members were on board. It is a hard sell when a member tries to go home and tell their significant other, “Honey, I want to give $10,000 a year to my family.” It becomes a much easier pill to swallow for the families involved when there is a document that lays out all terms and conditions, and it even easier still when a law firm is involved in the process of creating the document.

OUTCOME

We were able to draft a document that met the needs of every member and family member involved in the loan pool. All seven members of the Smith family agreed to the terms and conditions, signed on to the loan pool, and now that it has been running for a few years, three of the members, all of whom are in their mid-twenties, have already put down payments on homes.

 

 

 

*Name has been changed to protect client identity