How is it profitable at all to auction debt for pennies on the dollar?
In: Economics
Think of it as two distinct businesses. One is the lending business, another is the collection business for bad debts.
So you lend to 50 people, 48 of them pay back on time no issues. One guy let’s call him Bob is late, but is pretty sure after a month he can pay. So the company decides to hold him to it. Then there’s Sally. Sally just stopped playing and they can’t get in touch.
So lender realizes getting money out of Sally is going to be a chore. They will either need to sue, or adopt aggressive tactics. There’s legal risk: some collections tactics are illegal. There’s also a risk she’ll file for bankruptcy and extinguish the debt, they have no idea.
It’s a small percentage of their world, and lender’s people aren’t trained to deal with Sally. They’re trained to bring in more borrowers and service good borrowers. So they go to debt collector John and John says, I’ll give you 7 cents on the dollar for it. In other words, let’s say Sally was lent $100, John will pay the lender $7 and now Sally owes John the full $100.
The transaction is good for John, because he thinks he can squeeze her for more than $7 and make a profit.
It’s good for the lender because it gets *some* money. It also allows them to move on and focus on other stuff.
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