What’s stopping the other person in the group from withdrawing the deposit then not repaying the payments back?
Great question! StepLadder wants members to join their circles in good faith as to the fixed monthly on contributions being committed. That means the actions of bad apples are not to affect our members who go about completing their commitments to the circle.
We ask our joining members for the information we do to specifically weed out risks like you describe. Not only do we ask members before they join information to help screen and match for financial suitability for joining a circle, we also verify that information through independent information sources like credit bureaus and proof documents submitted as part of the on-boarding process.
The random selection each month of which member is credited the property deposit means that individual members do not choose for themselves when the property deposit is credited to their account. This serves to mitigate moral hazard from adverse selection – in other words the risk of someone intentionally taking the property deposit from the group and not repaying.
If unforeseen circumstances (such as involuntary unemployment or debilitating illness) cause the problem meaning the member can’t pay, we have insurance in place. So default consequences that follow in the text below are really about insulating our members from bad apples.
To mitigate the temptation of cash in hand, the property deposit is available for the member selected to use exclusively for purchase of a property – otherwise the money remains in escrow in a client money account overseen by StepLadder. No taking the lump sum to the casino!
Given that (I) the funds are released exclusively for buying a property (at least until the end of the Circle term) which has recoverable equity and that (II) the members have on-going income from employment and that (III) there is an immediate adverse credit report from defaulting on borrowing from other members and that (IV) the defaulting member knows personally the other members of the circle, we think that there is very good path to recovering value.
Remember, this discussion above is for those who have drawn the property deposit — it is a separate situation altogether if a member of an active circle wants to drop out BEFORE random selection. They are free to do so. A drop-out member can expect to receive their fixed monthly contributions back at the scheduled end of the Circle term. This preserves members’ flexibility. If you would like to find out more, you can get in touch with us here.