If A borrows from B, A now owes B
Then C shows up and pays B with the agreement that it settled A’s debt to B.
A does not know any agreement was made but the original A owes B
A goes to pay B.
B says A doesnt owe B.
C says A owes C
But A did not make an agreement that he owed C.
How does A owe C now?
It seems to me that: C gave A the gift of settling A’s debt to B.
In: Economics
So, think of the debt as a physical object. In fact it is a physical object. When A gets a loan from B, A signs what is called a promissory note. This is a contract and a promise to pay B a certain amount of money in a certain time frame, subject to conditions such as interest and maybe a repayment schedule. Basically this is an IOU. That note can be bought and sold just like any other piece of property. The note entitles the holder to collect the payments from A.
Person C is NOT settling the debt of person A with person B. They are purchasing the right to collect the debt from B. There are many reasons to do this. Maybe person A isn’t paying on time and person B is tired of dealing with it. Or maybe person B needs liquidity for their business to make payroll and can’t wait for the term of the loan to expire to collect the remaining money. In these cases the note is often worth less than the remaining value. Lets say that person A still owes $100 to person B. Person B could offer to sell the note to person C for $75 cash today. If person C can wait to collect the full $100 they just made $25 profit and person B now as $75 in cash that they would not have had until the loan matured.
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