Paluwagan: Meaning, Pros and Cons, and Tips to Avoid Scams

paluwagan fund

For the paluwagan meaning in Tagalog, the word itself is already Tagalog, literally, “maluwag.” The paluwagan meaning in English is “to ease up” or “easing up.” This Tagalog term also has an English formal counterpart – the Rotating Savings and Credit Association (ROSCA). Once you understand the mechanics of paluwagan, it is a sort of rotating savings.

What is Paluwagan?

Paluwagan is an informal group saving or money-lending system in the Philippines. Historically, the exact origin of the paluwagan system is not well documented. In the 19th Century, it became more widespread in low-income countries, immigrant groups, Muslim and Jewish communities, and colonies of European countries. In the Philippines, it was probably introduced by low-income Spaniards as an alternative financial instrument.  

How Does Paluwagan Work?

The basic concept of paluwagan is for a group of people to pool money and alternately withdraw from the pot money.

The concept works based on trust and commitment among its participants. In the Philippines, this can typically be friends, neighbors, co-workers, and even schoolmates. A group consisting of anywhere between 3 to 10 pools their contributions into a common fund and takes turns receiving the lump-sum payout monthly, twice a month, or weekly. The cycle continues until the last member is paid, and the cycle goes on again.

Members should agree on these paluwagan rules:

  • A fixed contribution amount
  • A fixed schedule for remittance and payout
  • The raffling and order of payout (who gets to be the first, second, and so on for the pot money)
  • Appointing a  member to act as “treasurer” in charge of collecting the contributions, handling the funds, and giving the scheduled payouts.  

For instance, four friends (Ramon, Irene, Evelyn, Jennifer) start a paluwagan. Each contributes P500 a month for a total of P2,000. In the first month, Irene is scheduled to receive the P2,000. In the second month, it’s Evelyn’s turn to get the same amount. Jennifer’s turn is next month, and this is followed by Ramon. A new cycle begins with Irene again.

Related: BPI Savings Account Requirements: Open an Account with Ease

Is Paluwagan Illegal?

Paluwagan is not illegal per se since it is organized by a group of people whose money just revolves around them. Also, joining a paluwagan group is purely voluntary. However, when paluwagan is used to recruit and collect money from investors with the intention of swindling, this makes it illegal with legal consequences. It also becomes illegal if employers force employers to join a paluwagan system.

The Pros or Advantages of Paluwagan

It Develops A Disciplined Habit Of Savings

For people who find it hard to have a regular bank savings account, a paluwagan can be your alternative because it forces you to put aside a regular stash. Not only is the savings concept personal, but it also becomes somewhat fun because the goal is shared with others, building a stronger social bond of friendship, trust, and responsibility.

The Payout Allows You To Access A Lump Sum Of Money

A paluwagan gives you instant funds for an important purchase you scheduled near the payout. Or you may need it as additional funds for your kid’s enrollment. Since you need to wait your turn for the savings payout, during unexpected or emergency expenses, members have been known to agree to switch payout schedules.

It Protects Consuming Savings

Since the savings are scheduled and kept in common pot money, members can avoid immediate consumption of savings. It is somewhat of a shield against splurging or impulse buying.

The Shared Risk Forces All Members To Make On-Time Contributions

Since all members have expressed a common commitment to the savings, everyone is pressured to comply with the agreed payment conditions. This is because if one member fails to make contributions on time, all members are affected, and no one wants to break this financial bond.

It Promotes A Shared Financial Goal And “Bayanihan” Spirit

Paluwagan promotes better trust and responsibility among its members, thus strengthening a sense of “bayanihan” through communal unity and cooperation. All members voluntarily participate and share the same financial goal – to have regular savings “pot money” and be able to enjoy the payout at the time of scheduled redemption.

Related: How To Send Money From Paypal To Gcash: Complete Guide 2022

The Cons or Disadvantages of Paluwagan

It is unregulated

Since paluwagan is informal, it is unregulated, and so doesn’t require any contracts or licenses. It depends mostly on common verbal agreement among the members. Should any member deny redemption of a lump sum or refuse to pay contributions, it is impossible to make legal claims.

It Does Not Earn Interest

Paluwagan is not a form of investment, and as such, the money doesn’t earn any interest.

It Is Highly Susceptible To Swindling

Who hasn’t heard of horror stories about paluwagan members being swindled by their collector? Since the system is not regulated by the government, there is a high risk of the collector running away with the money. Even if the person is a relative, close friend, or colleague, when money greed and temptation take over, it can be strong.

It Can Lead To Delinquent Payments

Some members who have spent their lump sum at the early stage of the cycle may become complacent and lazy to make succeeding contributions.

It Can Lead To Broken Trust And Relationships

When the paluwagan system fails, it is often because one or more member has failed, deceived, or betrayed. This leads to the loss of hard-earned money, and trust and relationships become strained or broken.

A Warning Against Online Paluwagan Scams

Online paluwagan schemes are gaining ground – and notoriety – on social media platforms recently. According to warnings published by the Department of Trade and Industry (DTI) and Securities and Exchange Commission (SEC), online paluwagan (called onpal) works like a pyramid scheme wherein members earn income from the money of new recruits. The onpal scheme rampant on social media today is nothing more than a type of online investment scam that promises members up to 75% profit in just a short time (a percentage that even legal financial institutions aren’t capable of). Needless to say, victims don’t get their money back.

Since these onpal scams are also unregistered and unregulated by the government, no legal contracts are used and signed. Thus, if a member is swindled of their money, there is no way to sue or file a legal case.


Paluwagan can be an attractive prospect to those seeking out additional financial security, but it’s important to ensure that you’re choosing the right group and taking necessary precautions. It’s a good idea to use a strong system for tracking payments, such as a reliable shared calendar tool; this helps each person keep up with their contributions and guarantees that there won’t be any confusion about money paid or debts collected. Additionally, keep your circle small in order to minimize the risk of fraud or theft – the fewer people who are party to the agreement, the better. Lastly, always trust your instinct; if at any point something feels off about your group dynamic or how payments are being handled, don’t hesitate to bail! Regardless of what decisions you make going forward with Paluwagan, it’s essential that yourself and those around you remain aware of potential risks and take steps towards mitigating them.

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