How is it profitable at all to auction debt for pennies on the dollar?
In: Economics
Because we cannot predict stuff accurately, institutions like banks follow certain guidelines and rules. Say someone borrowed $10,000 from a bank, then they get behind in repayment. The bank, following its rules, may decide “hmm this loan might not be repaid” and write it off. Rather than expecting $10,000, it might say, maybe it is worth only $10. To the bank, this might not be worth doing anything. It expects, through experience, that some borrowers default and they build that loss into their business model.
It packages these loans off and sells it to someone else, say a debt collector, for $10 who through their own efforts might be able to recover more than that from the borrower. This makes it profitable for the debt collector. This additional profit is “foregone” by the bank because it doesn’t really want to bother with certain types of debt collection (maybe bank employee salaries are too high to afford it)
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