Profitable to lend $ to people who can't repay?

Question

It's obvious that consumer lending is a very big, profitable business. But I still don't understand how lending money to someone who can't repay is profitable for the lender? Can someone pls explain the economics of this? "Can't repay" means that the person will never shell out any money paying the principal, compounded interest, late fees, overlimit fees, etc.

Answer 1

Yes, this is true to a point, they might not make a profit by selling your debt. But could break even.

They make a profit from interests & fees.

Debt companies will buy your dept, apply a large fee, then resell that debt again. And that 100$ you spent at best buy will cost you $1000 in no time.

Answer 2

It is a risk vs. gain scenario. A person with bad credit and a history of bad loans will be given a loan that has substantial upfront fees and will have a very large interest rate. The loan company will also put terms in the contract that makes it hard for the person to get out of the loan and also makes it easier to add more fees or up the interest rate even more. I read about one credit card that had a $300 limit but the up front fees that had to be paid came to over $200. These were placed as balance on the card. If the person defaulted with just that balance then the bank has not really lost much. Just a few payments and the bank is in guaranteed profit zone.

Now, lending to only one person like this does not make sense. You would be gambling. Will that person repay or not? If that person does, you will make a lot of money. However, if that person does not then you stand to lose a lot of money. Now imagine lending to a thousand people in the same situation. The idea is to charge enough fees and get enough interest from the few that do pay back to cover what is not paid back by the others and have a little profit left over. It is not as hard as you think. The danger comes when too many people default and you end up losing money on them.

Answer 3

my guess is that its a big numbers crunching game - enough limp though with their payments (who cares if they are scratching by), some pay enough (with fees and interest) to make it profitable even if they don't pay it all back, and in some cases, they pay enough and then the lender reposseses or forecloses and can still make a profit. In the long run, though, bad lending will sink the company.

Answer 4

Before they lend you money you have to fill a form which gives them some very good ideas how they can get their money from you, in the last resort.