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.
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.
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.
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.
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.
It is now apparent why creditor number two purchases the portfolio. It makes a huge profit. If creditor number two sells the remaining portfolio to a third creditor, the cost will be something closer to two cents on the dollar. Creditor number three will still make an excellent ROI.
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.
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.
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.
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.
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.
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.
It is now apparent why creditor number two purchases the portfolio. It makes a huge profit. If creditor number two sells the remaining portfolio to a third creditor, the cost will be something closer to two cents on the dollar. Creditor number three will still make an excellent ROI.
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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