At first glance buying debt does not seem to make any sense. Why would anyone want to purchase a portfolio that has been deemed noncollectable by the original creditors? The reason is, people and companies that purchase debt portfolios for sale make a substantial profit on their investment. The portfolio is purchased for a few pennies on the dollar, yet the second creditor will attempt to collect the entire amount. Even if the second creditor only collects one fourth of the portfolio, it will still make a huge profit.
Traders take a basket of noncollectables and package them as one purchase product. Consumers have been known to misuse or even abuse credit. Often this is done unintentionally, or because some consumers do not fully appreciate the difference between money in the bank and a line of credit. Eventually their capacity to borrow runs out, and consumers simply are not able to make the necessary payments. Next comes collection calls, low credit scores and wage garnishments.
Some, but not all of these debtors end up filing bankruptcy. Creditors spend a lot of time and money trying to collect on their receivables. At some point, creditors will choose to write off the debt and sell it to a third party, who becomes the second creditor. The second creditor on an average pays about four cents on the dollar. Newer debt will cost more, while the older will cost a less. With the four cents on the dollar average, a portfolio valued at fifteen thousand dollars will cost the second creditor six hundred dollars.
If the second creditor in this example is able to collect twenty five percent of the portfolio, it will collect three thousand five hundred dollars. In this example, their profit is two thousand nine hundred forty dollars. Even if creditor number two never collects one more penny on this portfolio, it has made a return on its original investment of roughly 5.25, which translates into five hundred twenty five percent ROI.
On a grander scale, sometimes the basket of debt is from a retailer like a credit card company. In this case, the portfolio will be much larger. In this example, the portfolio is valued at one hundred fifty thousand dollars. The second creditor buys the debt for four cents on the dollar, which is six thousand dollars.
In this numbers game, the second creditor is able to collect twenty five percent of the portfolio, fifty thousand dollars. Subtracting its investment of 8,000 dollars, creditor number two has a profit of 42,000 dollars. Again, 5.25 times the investment or an ROI of five hundred twenty five percent.
This explains why people and companies purchase debt. They make lot of money on a modest investment. Usually, creditor number two will sell the remainder of the portfolio to another creditor. This time around the cost will be close to two cents on the dollar. Still, even if it only collects on a small portion of the portfolio, the third creditor will make a substantial profit.
Everything in these examples benefits all the creditors. There is no benefit to the debtor consumer. It is stressful to be afraid to answer your phone, because you know it is going to be another nasty collections call. Many consumers would benefit from some education on how to manage credit. Too often they learn things the hard way.
Traders take a basket of noncollectables and package them as one purchase product. Consumers have been known to misuse or even abuse credit. Often this is done unintentionally, or because some consumers do not fully appreciate the difference between money in the bank and a line of credit. Eventually their capacity to borrow runs out, and consumers simply are not able to make the necessary payments. Next comes collection calls, low credit scores and wage garnishments.
Some, but not all of these debtors end up filing bankruptcy. Creditors spend a lot of time and money trying to collect on their receivables. At some point, creditors will choose to write off the debt and sell it to a third party, who becomes the second creditor. The second creditor on an average pays about four cents on the dollar. Newer debt will cost more, while the older will cost a less. With the four cents on the dollar average, a portfolio valued at fifteen thousand dollars will cost the second creditor six hundred dollars.
If the second creditor in this example is able to collect twenty five percent of the portfolio, it will collect three thousand five hundred dollars. In this example, their profit is two thousand nine hundred forty dollars. Even if creditor number two never collects one more penny on this portfolio, it has made a return on its original investment of roughly 5.25, which translates into five hundred twenty five percent ROI.
On a grander scale, sometimes the basket of debt is from a retailer like a credit card company. In this case, the portfolio will be much larger. In this example, the portfolio is valued at one hundred fifty thousand dollars. The second creditor buys the debt for four cents on the dollar, which is six thousand dollars.
In this numbers game, the second creditor is able to collect twenty five percent of the portfolio, fifty thousand dollars. Subtracting its investment of 8,000 dollars, creditor number two has a profit of 42,000 dollars. Again, 5.25 times the investment or an ROI of five hundred twenty five percent.
This explains why people and companies purchase debt. They make lot of money on a modest investment. Usually, creditor number two will sell the remainder of the portfolio to another creditor. This time around the cost will be close to two cents on the dollar. Still, even if it only collects on a small portion of the portfolio, the third creditor will make a substantial profit.
Everything in these examples benefits all the creditors. There is no benefit to the debtor consumer. It is stressful to be afraid to answer your phone, because you know it is going to be another nasty collections call. Many consumers would benefit from some education on how to manage credit. Too often they learn things the hard way.
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