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Debt Buying

What is debt buying?

This is when a “Debt Buyer” purchases creditors’ debt at a discount. Delinquent or charged-off debt is purchased at a fraction of the face value.

How does debt buying work?

Debt Buyers purchase large portfolios of delinquent debt from credit card issuers. Many credit card issuers in the United States use debt buyers to recoup money on unpaid debts. Once a portfolio has been sold, the original creditor no longer has control over how the debt gets collected. Debt buyers are given ownership of that account for a smaller return for any institution. After given ownership, the Debt Buyer is to leverage the value of the outstanding, delinquent debt to see a return on their investment. Here they have more flexibility than the original lender in terms of recovering funds from the lender.

Why invest in buying debt?

The financial institution’s primary business purpose is to lend money and get paid interest every month, resulting in huge profits. A small portion of these consumer loans or credit cards will default and become a non-performing asset. Banks go through a traditional in-house collection process for 180-210 days without payment and write-off the debt. At this point, a portion if not all of these accounts are sold to a debt buyer. Some creditors such as payday advance loans could be sold as early as 60-90 days past due. Collecting debt is not a lender’s primary business, and prefer these accounts off their balance sheet. This can be extremely advantageous to an investor to buy these delinquent accounts for much less than the amount owed and use the necessary collection resources to have a solid return on their investment.

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