Learn more about consórcio, a very popular purchasing modality in Brazil, commonly used to the purchase of cars and real estates.
What is Consórcio?
A lot of people do not know, but “consórcios” are a Brazilian invention, that dates back to the 60's decade and afterwards was disseminated to several countries. Its central idea is pretty simple: to gather a group of people that has the same consumption purpose.
So a consórcio (consortium, in English) is nothing more than a group of people (individuals or incorporated) united by their common interest on purchasing a determined durable good, such as a car or an apartment.
The typical profile of a consortium partner is someone interested in a determined good, but without the immediate necessity to have it. Also, it requires that the player has got some extra money. This group must be administrated by a specialized company that will be responsible for making the whole consortium operation possible. And for that, this company collects an administration fee from all the players.
Banco Central do Brasil is the competent authority that takes care of all the matters related to the Consortium System in the country, including the inspection and supervision of the Administrator companies. There are a series of requirements that companies must comply in order to operate.
To check if a certain administrator company counts with the BC's permission to operate, access the Associação Brasileira de Administradoras de Consórcios, Abac (Consortium Administrators Brazilian Association) or the BC website.
How does it Work?
It goes like this: the administrator company divides the price of the good in question in a large number of installments, to be paid by all the consortium's partners every month. That money is accumulated as a common saving. The administrator does this division in a way that makes it possible to buy one or more unities of the consortium's good by month.
Then, the administrator contemplates one or more of the consortium partners (chosen through a raffle) with a letter of credit, that makes it possible for to the buyer to purchase the good in cash, avoiding interests, present in a financing plan, for example.
Beyond the raffles, most of the consortium plans allow the players to offer bids in order to anticipate a certain number of installments. Whoever gives the higher bid, takes the letter of credit.
Is a Consortium Plan Better than a Financing Plan?
In terms of the installments' value, yes, as the administrator profits on the fee charged over the value of the credit letter. For example: if you sign up for a 100 months consortium plan to acquire a one hundred thousand reais credit letter, with an administration fee of 20%, you will pay installments of BRL 1200.
It looks a lot, but actually that is a mechanism much more economic than a financial plan that charges 1% a month on interests, for example. If you opt for one of those financial plans for one hundred months, you will pay installments of BRL 1571.
However, with the financial plan you can enjoy the purchased good from the moment you sign it, differently from the consortium.