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.
Surprisingly, not all of these debtors end up in bankruptcy court. Collecting is expensive for creditors, and in some cases they will sell the debt to a second creditor and then write it off. The original creditor will sell the portfolio to the second creditor for much less than its face value. The average price is four cents on the dollar, with newer debt costing a little more and older costing a little less. For example, if a creditor owns fourteen thousand dollars worth of debt, a second creditor can now purchase the entire basket or portfolio for a mere five hundred sixty 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 larger scale, when a credit card company has hundreds of consumers who fail to make payments for long periods of time, the credit card company can package all those individual debts into a single portfolio and sell it to a second creditor. In many cases the second creditor is a collections agency. The collections agency purchases a portfolio valued at 140,000 dollars for 5,600 dollars, or four cents on the dollar.
In this numbers game, creditor number two collects twenty five percent of the original value of 150,000 dollars. The creditor will then collect 37,500 dollars on a 6,000 dollar investment. The profit of 31,500 dollars is again, 5.25 times the investment. A return on investment, ROI, of five hundred twenty five percent is phenomenal.
The benefit to the creditors is clear. They make a huge amount of money on a very modest investment. Eventually the second creditor will sell the rest of the portfolio to a third creditor that will pay fewer cents on the dollar, yet still get a very substantial return on its investment.
This is all good news for the creditors, but nothing in these scenarios benefits the consumer debtor. Credit can be a good thing when used wisely, but it can be very bad when abused. Consumers should be educated to use credit sparingly and live within their income.
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.
Surprisingly, not all of these debtors end up in bankruptcy court. Collecting is expensive for creditors, and in some cases they will sell the debt to a second creditor and then write it off. The original creditor will sell the portfolio to the second creditor for much less than its face value. The average price is four cents on the dollar, with newer debt costing a little more and older costing a little less. For example, if a creditor owns fourteen thousand dollars worth of debt, a second creditor can now purchase the entire basket or portfolio for a mere five hundred sixty 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 larger scale, when a credit card company has hundreds of consumers who fail to make payments for long periods of time, the credit card company can package all those individual debts into a single portfolio and sell it to a second creditor. In many cases the second creditor is a collections agency. The collections agency purchases a portfolio valued at 140,000 dollars for 5,600 dollars, or four cents on the dollar.
In this numbers game, creditor number two collects twenty five percent of the original value of 150,000 dollars. The creditor will then collect 37,500 dollars on a 6,000 dollar investment. The profit of 31,500 dollars is again, 5.25 times the investment. A return on investment, ROI, of five hundred twenty five percent is phenomenal.
The benefit to the creditors is clear. They make a huge amount of money on a very modest investment. Eventually the second creditor will sell the rest of the portfolio to a third creditor that will pay fewer cents on the dollar, yet still get a very substantial return on its investment.
This is all good news for the creditors, but nothing in these scenarios benefits the consumer debtor. Credit can be a good thing when used wisely, but it can be very bad when abused. Consumers should be educated to use credit sparingly and live within their income.
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