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.
A portfolio in this instance will be a basket full of individual debts sold as one. Many consumers do not live within their means and use credit as if it were money in the bank. Bad financial behavior can continue for years as the debtor literally continues to borrow from Peter to pay Paul. It comes to a halt when the ability to borrow is extinguished. The awful stream of collection calls, wage garnishments, nasty letters and bad credit scores then become an every day occurrence for the debtor.
Some debtors wind up filing bankruptcy, but many are able to avoid bankruptcy. It is costly for creditors to collect on receivables that are not paid promptly. After a period of time, creditors will sell the unpaid receivables to a third party and write off the debt. The second creditor that buys the portfolio will only pay about four cents on the dollar, on average. Newer debt may be a few pennies more and older a few pennies less. As an example, the first creditor that owns twenty thousand dollars of debt will sell the entire portfolio to a second creditor for eight hundred dollars.
In this instance, if the second creditor can collect 25 percent of the original value, it will collect three thousand seven hundred fifty dollars on a six hundred dollar investment. If it never collects another dollar from this portfolio, it has made an incredible return on its investment. The second creditor was able to collect 5.25 times the purchase price of six hundred dollars.
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, 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.
This process benefits all the creditors, but it does not do anything to benefit the debtor. Life can be very unpleasant when creditors are dunning you for payment. Consumers should do their best to live within their means.
A portfolio in this instance will be a basket full of individual debts sold as one. Many consumers do not live within their means and use credit as if it were money in the bank. Bad financial behavior can continue for years as the debtor literally continues to borrow from Peter to pay Paul. It comes to a halt when the ability to borrow is extinguished. The awful stream of collection calls, wage garnishments, nasty letters and bad credit scores then become an every day occurrence for the debtor.
Some debtors wind up filing bankruptcy, but many are able to avoid bankruptcy. It is costly for creditors to collect on receivables that are not paid promptly. After a period of time, creditors will sell the unpaid receivables to a third party and write off the debt. The second creditor that buys the portfolio will only pay about four cents on the dollar, on average. Newer debt may be a few pennies more and older a few pennies less. As an example, the first creditor that owns twenty thousand dollars of debt will sell the entire portfolio to a second creditor for eight hundred dollars.
In this instance, if the second creditor can collect 25 percent of the original value, it will collect three thousand seven hundred fifty dollars on a six hundred dollar investment. If it never collects another dollar from this portfolio, it has made an incredible return on its investment. The second creditor was able to collect 5.25 times the purchase price of six hundred dollars.
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, 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.
This process benefits all the creditors, but it does not do anything to benefit the debtor. Life can be very unpleasant when creditors are dunning you for payment. Consumers should do their best to live within their means.
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