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Should You Invest In A Debt Purchasing Company?

by Daniel Herrera

With nearly three percent of loans in default or delinquency at any given time, the debt purchasing industry continues to expand at a steady pace. If you've ever considered expanding your investment portfolio, or if placing your funds in stocks or real estate just isn't up your alley, you might want to consider investing in a debt purchasing company, or even purchasing (or collecting) debt privately on your own. Read on to learn more about the advantages and potential disadvantages of debt buying as an investment.

How do debt purchasing companies make money?

When credit card companies, doctor's offices, and other businesses that extend credit or provide services before payment is made run into a consumer that won't pay his or her bill, they're faced with a difficult decision -- whether to attempt to collect on the debt themselves or simply sell the debt to a collection agency to recoup some of their costs. Because there are specific state and federal laws governing the collection of outstanding debt (with stiff financial penalties for violating these laws), it can sometimes be in a business's best interest to simply sell the right to collect the debt, write off the remainder as a business expense, and avoid the complexities of the collection and small claims process. 

Debt purchasing companies buy bundles of these bad loans (for an average of 5.2 cents on the dollar) and then attempt to collect from the borrower. These attempts can range from telephone calls and letters to summonses and small claims court lawsuits. Often, debt collectors employ a number of phone operators and personal investigators who are able to track debtors down and obtain banking information or negotiate settlement agreements.

Even if debt purchasers can only collect from a few borrowers, and even if they must settle for less than the total amount owed, they will likely still end up ahead. For example, if a debt purchasing company purchases $100,000 in bad debt for $5,200 and is only able to recover from 25 percent of the debtors, the company will still end up with almost $20,000 in profit. The more borrowers from which the company can successfully collect, the higher these profit margins rise. The ability to purchase this debt for pennies on the dollar also lowers the barriers to entry in this industry, and can allow potential investors to get started with relatively little capital.

How can you invest in a debt purchasing company?

There are several ways to invest in a debt purchasing company or even to begin purchasing debt yourself. The safest -- and least involved -- way to invest in one of these companies is to purchase an exchange-traded fund that includes publicly-traded debt collection agencies. This will allow you to enjoy periodic dividends and increases in the share price without having to participate in the debt collection process yourself or provide any oversight.

You may also want to invest a lump sum into a local or regional debt buying company. Although this is riskier -- you're tying up all your money in a single company rather than a portfolio of several companies -- it also offers a greater return on your investment. Depending upon the amount of money you invest and the size of the company, you may also be able to exercise control over the type of debt purchased and the lengths to which the collectors themselves will go in order to recover the funds.

Finally, you can purchase debt yourself by approaching local businesses or service providers to see if they'd like to sell you their old delinquent accounts. If you're able to offer a higher than average rate to purchase a relatively small amount of debt from these businesses, you'll be able to get your start and determine whether debt collection is right for you without risking a large sum of money. Before embarking on this route, you'll likely want to consult an attorney or financial provider who is well-versed in the debt collection process to determine you're complying with all applicable laws and regulations. For more information on buying debt go to sites like this one.