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 debt when they’re no longer interested in collecting on that debt. Sometimes collecting debt is easy. For example, a bank may loan out $15,000 to Becky and Becky is responsible and she pays her monthly statement without any fuss so the bank doesn’t have to spend any money to collect. Sometimes collecting debt is hard. For example, Johnny may have decided he no longer wants to pay back his credit card so now the bank has to spend money on collectors to call Johnny, letters asking him to pay, and if this goes on long enough lawyers to take him to court. Sometimes a bank says enough is enough and they’ll sell the debt. The debt they’re selling is the money that’s still owed by the customer and they’re selling it for a price less than that. The companies that buy debt are gambling. If they pay a little bit of money for the right to collect the debt they’re hoping they can convince, or legally force the debtor to pay up. Sometimes banks also sell debt that’s not delinquent if they think it’s high risk. Someone poor living in an expensive house may be paying now but what if the economy goes down and they lose their job? The bank would rather sell for less than the total they could collect than risk not getting paid at all later.
The bank owes money to 3 main groups. First, it owes money to its customers. Customers who open checking and savings accounts are essentially giving away their money for the bank to loan out to others. The bank pinky swears the money will be there when the customer wants to withdraw but the reality is if all the customers wanted cash at once the bank wouldn’t be able to pay them all back. Second, the bank owes other private banks. Banks are just like any other business and when they need money to expand they can ask another private bank for money. Third, the bank has it’s own bank. In the US it’s called the Federal Reserve (each country except Cuba & North Korea has its own national bank you can look up which is for which country). The Feds are responsible for printing money. The way they distribute the printed money is by loaning it out to banks so that the banks can loan it out to businesses and people. The Feds are responsible for a lot of the money that’s loaned out. I can’t explain how the Federal Reserve works in a simple way but basically they use fancy math to try and keep the economy from collapsing (they’re not very good at it imo).
Banks don’t solely profit off loans! They have other products too! Their two big sources of revenue are fees and investing. We’ve all dealt with fees, banks charge what they feel is fair to use their products and they charge fees if you do something they don’t like. Second, they invest money. The economy is always growing so investing is always going to make money. They use both their own money, and the money from investment accounts, to buy and sell stocks and bonds which generate profit. I’m assuming you’re asking about how new banks get their money. The reality is it takes a LOT of money to open up a new bank. “Small” banks have a lot more money than you think and there’s laws and standards practices in place that dictate how much money banks have on hand to operate. Opening a bank is nothing like opening a regular business. You can’t just start with no money.
Hope this answers your questions. If something is unclear or this made you think of more questions don’t be afraid to ask! I’d be more than happy to explain further the mind boggling banking system.
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