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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, 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.
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.
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.
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, 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.
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.
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.
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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