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.
Creditor number two may only be able to collect about one fourth of the portfolio. In this case it would collect five thousand dollars on a eight hundred dollar investment. The second creditor has made a profit of 5.25 times its investment. Without any further collections made, creditor number two has shown a substantial profit.
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.
This is numbers game. If creditor number two in the second example collects 25 percent of the original 140,000 dollars, it will collect 35,000 dollars on an investment it purchased for 5,600 dollars. This is a profit of 29,400 dollars, which is 5.25 times greater than the investment, making the ROI 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.
Creditor number two may only be able to collect about one fourth of the portfolio. In this case it would collect five thousand dollars on a eight hundred dollar investment. The second creditor has made a profit of 5.25 times its investment. Without any further collections made, creditor number two has shown a substantial profit.
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.
This is numbers game. If creditor number two in the second example collects 25 percent of the original 140,000 dollars, it will collect 35,000 dollars on an investment it purchased for 5,600 dollars. This is a profit of 29,400 dollars, which is 5.25 times greater than the investment, making the ROI 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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