How to Buy Payday Loan Debts

Buying payday loan debts is a form of alternative financial investment, compared to investing in stocks, bonds or other traditional financial securities. Specialized debt-buying companies and other businesses with extra capital may consider buying payday loan debts for their discount pricing, often at pennies on the dollar. Some debt collection companies are especially interested in taking over and collecting payday loan debts because of their smaller account balances, widely considered to be easier for borrowers to pay off. Payday loan debts for sale are borrowing accounts in serious delinquencies, and lenders have subsequently charged off the accounts for third-party collections. Depending on investors' collection results, buying payday loan debts can be potentially a profitable proposition.

Choose Investment Market Channels

Payday loan debts are both sold directly by payday loan lenders and resold on the secondary market by payday loan investors through repackaging their existing debt holdings. Buying payday loan debts directly from lenders often requires investors to commit to taking over large portfolios of delinquent accounts with considerable amount of capital. Lenders prefer to work with a small selection of pre-approved investors and if possible, sell their debts to a single buyer using the so-called forward flow agreement that obligates a debt buyer to transact a fixed amount of debt over a specified period at a predetermined price. Businesses that do not have the required capacity may have to wait to buy from large buyers on the secondary market for a smaller loan portfolio.

Identify Payday Loan Lenders

The payday loan industry consists of both small lending stores and established companies including publicly-traded payday loan operations. Gather information about a payday loan lender before deciding to buy its debts, and do business with lenders that either are reputable or an investor has good knowledge about. A payday loan lender is responsible for providing debt buyers with relevant documentation such as original account application, monthly statement and charge-off notice to prove that the named borrowers owe the money and the debt buyers will legally own the accounts. Without securing authentic, lender-supplied documentation, debt buyers risk facing potential court challenges in collection disputes and losing out on their investments.

Analyze Loan Portfolios

Before deciding to buy payday loan debts in the market, investors must assess the potential merits of the target loan portfolios. Information regarding the size of the loan accounts, who owes on the accounts, how long the accounts have been in delinquency and any past collection efforts on the accounts can all help investors in predicting the future performance of the target loan accounts, which will ultimately affect their investment returns. Studies show that typical borrower behavior points to the possibility of borrowers' paying off smaller debt balances first. Thus, by locating loan portfolios with higher collectibility, payday loan buyers can increase their chance of achieving better investment returns.

Negotiate Debt Prices

Payday loan lenders usually sell their charged-off debts at a discount to the loan face value. But the degree of the discount, or the loan price, depends on market conditions of supply and demand on payday loan debts. When lenders see increases in the number of their delinquent accounts, they may also decide to increase the amount of uncollected debts for sale to investors for immediate cash, potentially driving deeper the loan discount. On the other hand, as more buyers come to the market, including hedge funds, private equity firms, collection agencies and average businesses, ordinary investors, the competition may push up loan prices. Compare a loan price with the potential recovery rate to leave enough room for the profit margin.

Decide on Loan Collections

Successfully buying a payday loan debt is only the start of the investment, and the next task, maybe a harder one, is how to collect payments from borrowers for investment returns. Buyers of payday loan debts often are classified as either active investors or passive investors. While debt collection agencies and specialized debt investment companies have the capability to collect their purchased accounts themselves, average business and investors may invest in payday loan debts, but then outsource collection activities to a professional debt collector or debt collection law firm.

Monitor Investment Returns

Buyers of payday loan debts in general are expected to earn a profit because of the deep discount pricing, which may not require a high level of recovery rate. Buyers can also rely on the better collectibility of their small-balance payday loan debts. Oftentimes, lenders don't even lose money when selling their outperforming loans to investors because of the amount of high interest they already receive from borrowers along the way. In the end, even if borrowers do not pay off their full, stated balance, there may be still room for buyers of payday loan debts to make a profit under the right loan price.