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
Say you owe the bank $10,000 that you haven’t paid for 10 years. The bank is starting to lose hope they’ll ever get that money back.
Then a debt collector approaches the bank and says ‘we’ll buy the **rights** to that $10,000 from you for $2,000 that we can pay you **right now**.’ The debt collector taking a risk because they don’t know if they can get the $10,000 from you.
The bank then decides they’d rather have the $2,000 now than the $10,000 they’re actually owed, because they don’t actually think they’ll be able to get the $10,000 back from you.
The debt collector then goes after you for the $10,000 you owe, and if they are successful in collecting, they essentially made an $8,000 profit off of buying *your* debt from the bank you owed it to.
When you ‘sell debt’ you’re essentially just selling the right to collect money that was originally owed to you, but is now owed to the purchaser of that debt.
Banks lend to guarantee themselves profit at fixed rates. The riskier the loan, the higher the interest rate to help the bank offset the risk the borrower defaults (fails to repay). Banks generally make little interest from more secure lending like it performs for mortgages, because the asset being purchased has its own value, so in the event someone stops paying their mortgage, the bank gets the home to sell. For products like credit cards, the bank engages in the trade off. They have very little recourse in the event of a CC holder refusing to pay, beyond ruining the borrowers credit and selling the debt. In exchange for this much higher risk, the bank reaps a much higher premium on the debt *that isn’t paid in full each month*. People that use credit cards routinely for the “rewards” pay off their card in full each month and pay *nothing* in interest to the lender. The bank or lender makes money on these “deadbeats” (the ironic term CC companies use to refer to responsible payers) by charging the merchants transaction fees for accepting their CC. The debt they sell to debt collectors from those who ultimately fail to repay is truly not worth their time. Attempting to collect is costly; it requires someone to hunt down contact info, it requires constant attempts to contact, it requires being willing to maintain a chain of custody on the proof of debt that would make prosecutors sweat. It just isn’t worth their overhead if they are collecting even 20 cents on the dollar. So they sell the debt for just a few cents on the dollar to outsource that overhead and potential reward. This allows them to focus more of their time on expanding their client base, and making ever more enticing systems to ensnare their favorite type of borrower… the one that makes the minimum payment each month and lives in compounding interest hell!
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