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 take in money in the form of checking, savings accounts, Certificates of Deposit, etc. and then lend out that money for car loans, mortgages, business loans, credit cards, etc. The spread between interest they pay on deposits and the interest they charge to borrowers is their primary source of revenue. It’s a matter of scale — lending billions of dollars, even a couple percent spread ads up.
But sometimes banks/lenders cannot collect money they’ve loaned out. They eventually want to get those loans off their books and move on… there are tax benefits to writing them off, carrying un-collectible debt makes their books messy, etc. So they’ll sell the debt for a fraction of what’s owed to debt collectors.
The collectors then make money by trying to collect more than they paid for the debt. Say somebody has a $3000 credit card balance the bank wrote off and sold for $500. The debt collector is hoping they’ll be able to extract something more than $500 from the debtor. Sometimes they’ll strike out and get $0. Sometimes they’ll eventually collect the entire amount.
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