On the surface, this process appears to be counter intuitive. Any reasonable person would ask why would anyone want to purchase debt that is being sold because the original creditor was not able to collect? The simple answer is, because this is a profitable enterprise for the debt buyer. Debt portfolios for sale will make money for the buyer, because the portfolio is purchased for a few pennies on the dollar.
A portfolio is a basket of unrelated debts that are packaged as one purchase for the buyer. Consumers may not intentionally abuse credit, but when they have to borrow from one source to pay another, it becomes the road to financial ruin. It can take years for bad financial habits to eliminate the capacity to borrow or get credit. When this happens, collection calls, bad credit scores and wage garnishments become a part of every day life for the consumer.
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.
This happens all the time on a larger scale. Retailers often sell their noncollectable receivables to a second creditor, which may be a collections agency. All these nonpaying customers put into one portfolio in this example equal two hundred thousand dollars of noncollectable receivables. Creditor number two buys the debt portfolio for eight thousand dollars, which is four pennies on the dollar.
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.
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 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 is a basket of unrelated debts that are packaged as one purchase for the buyer. Consumers may not intentionally abuse credit, but when they have to borrow from one source to pay another, it becomes the road to financial ruin. It can take years for bad financial habits to eliminate the capacity to borrow or get credit. When this happens, collection calls, bad credit scores and wage garnishments become a part of every day life for the consumer.
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.
This happens all the time on a larger scale. Retailers often sell their noncollectable receivables to a second creditor, which may be a collections agency. All these nonpaying customers put into one portfolio in this example equal two hundred thousand dollars of noncollectable receivables. Creditor number two buys the debt portfolio for eight thousand dollars, which is four pennies on the dollar.
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.
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 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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