Investing in Debt for Beginners
Wipe our Debt (Photo credit: Images_of_Money)
Whilst many people do nothing more adventurous with the money they manage to save than leave it in a bank account to earn a small amount of interest every year, others like to take a more proactive approach to planning for a rainy day and seek out value for money opportunities that offer the best return on investment without posing too much of a risk. However, the majority of such people still stick to the better known financial instruments: equities, bonds and so forth. The idea of buying debt is alien to most individuals, but there is no reason why you cannot do so and benefit from the same high return enjoyed by corporate investors.
In simple terms
The biggest hurdle facing those who are actually prepared to consider purchasing a credit agreement from a finance company is that they do not really understand what they are doing. In simple terms, somebody that buys a debt is assuming the risk that the debtor will not pay the money due, and they are rewarded for taking this risk with a much higher rate of interest than they would receive from lending their money to a bank – when you put your cash into a savings account, you are effectively acting as a creditor for the bank that holds your account. When evaluating such investments, it is important to consider your own risk appetite, just as a corporation does whenever they invest money in financial instruments or use capital to expand their business operations. This is to ensure that you are fully aware of what you are doing before committing yourself to any particular course of action.
Basic features
The safest debt contracts, in terms of the risk of default, which can be purchased in South Africa and other countries around the world have a number of features in common:
- The original creditor has already hired a lawyer and obtained a favourable judgement against the debtor in the form of an attachment of earnings order.
- The debt has then been sold on to a firm that specialises in the buying and selling of such financial instruments.
- Because the monthly payments are automatically deducted from the debtor’s monthly salary at source, there is very little risk of them defaulting on the debt if they hold on to their job.
- The interest rate the debtor has to pay is far higher than the rate a saver can obtain when opening conventional bank accounts.
- The company that sells the debt to individual investors takes care of all the administrative details so that all the investor has to do is wait for the payments to arrive every month.
What to do next
If you are interested in finding out more about this type of investment, you need to contact a company that specialises in them and find out exactly what terms and conditions apply to the debt contracts with which they deal. Once you are satisfied that you have identified the most competitive organisation, consider how much capital you are prepared to risk and the income you need to make on a monthly basis. If the two figures are incompatible, you need to rethink your strategy and come up with some new figures.
There are no hard and fast rules as far as investing in debt in concerned. In much the same way that the strategies employed by those investing in the stock markets of the world are largely a matter of personal preference, the amount and quality of debt that you choose to buy is entirely up to you and should be based on your long-term financial goals.
Category: Debt
