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 get the money from people who deposit it in their bank.
We use something called “fractional reserve banking” which means that a bank only needs to maintain a fraction of the total money its customers deposit in their “vault.” So say I deposit $100 dollars in my bank, my bank may loan out $70 of that, and keep $30 on hand to keep up with requests for withdrawals.
Banks don’t really provide a high return to depositors, only like half a percent on interest, the main service the bank provides is keeping your money safe, and easily accessible. They do loan out your money, but the risk of loss is very low, so the returns are also low. But the banks do make money on the interest. Which is paid monthly. It would take a long time for a new bank to start turning a profit, but they receive a lot of money from deposits, so they can keep it going until they see that return.
When a bank or other organization “sells debt” it is not the bank that owes money, but rather someone who owes money to bank. What they are selling is the title to that debt. Say you borrowed $100 from me. You aren’t paying me back and I don’t want to deal with it, so I sell that debt to my friend john for $70. Now you are obligated to pay john back instead of me, as he now owns the title to that debt.
Banks or other organizations sell their claim to debt when they think the cost of collecting it is greater than the actual value of the debt. Say you have someone who isn’t paying you back, you can either hunt them down, and pay for a lengthy legal battle to get repayment, or, you can sell the debt for less than its face value, and let someone else deal with it. Which is often times what companies prefer to do. And the debt collectors take their chances on the business model that they are going to be able to get the debt paid, for less than they paid for the ownership of that debt.
Latest Answers