Hello!
I just watched “Buffaloed”- a movie on Hulu… which goes into great detail about debt collectors in America. How they buy debt from banks for pennies on the dollar, and then come after debtors for the full debt making immense profit when the “debt” is repaid.
My question is, why does the bank need to sell the debt?
To whom does the bank owe money too?
I know banks give loans, but where do they get that money?
I know they can make profits off interest, but would that not take YEARSS to do before seeing profits large enough to dish out real cash to borrowers in a newly established bank?
I see how it all just cycles basically but my brain still doesn’t fully comprehend.
Maybe I’m asking for too much, and if I am and nobody has the time to explain- maybe someone could point me into the direction of educational material online because I’m not finding much on Google that doesn’t give me a headache because there is oftentimes a lot of financial jargon.
And before I get roasted, I went to a sh-t public school system deep in the rural south and I am still young, so please excuse me for my very very shallow understanding of all of this.
In: 5
Banks sell the debt to make *something* back from a bad loan.
I loan you $100, you run off and I can’t find you.
I contact a debt collector and sell the right to collect the loan for $5. I’m still out $95 but hey its something.
They track you down and say hey if you pay them $10 they’ll leave you alone. You give it to them because you can swing that.
Even if they can’t find you they can buy 20 debts to collect on for cheap and if just a couple pay back anything then they’re doing well. It’s a volume business.
That’s how selling a debt works.
How banks get their money to make loans in the first place is a separate issue. That comes from fractional reserve banking. Essentially everyone’s checking accounts is a pool of money that the bank can loan out because most people are just leaving their money in there. Even in an age before electronic banking if you deposited $100 in the bank and later took it out it wouldn’t literally be the same money.
That did lead to problems when everyone tried to withdraw their money all at once and was called a ‘bank run’ but nowadays we have an organization called the FDIC that insures most of our checking accounts from this even if the bank fails.
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