Late payments lower what a buyer will pay, because they raise the odds of trouble later. How far the price falls depends on how late the payments were, how recently, and whether the payer has caught up and stayed current since.
The pattern counts for more than the number
A buyer reads the whole payment record. A few late payments five years ago and the same number in the last six months are different notes to them.
| What the record shows | What a buyer makes of it |
|---|---|
| Paid a few days after the due date, every month | A habit more than a warning, often because the payer’s payday falls after the due date. |
| One or two late payments years ago, clean since | Minor. The recent record carries more weight. |
| A month or more behind, then caught up | A concern. The buyer will want to know what happened and where the catch-up money came from. |
| Late several times in the last year | A clear drop in price, since the trend is recent and may be continuing. |
| Behind right now | The note may be priced as non-performing, which is a separate market with its own buyers. |
Check what your note says about grace periods and late charges before you describe the record to anyone. A payment that arrives inside a grace period written into the note is generally not counted as late.
Why the price moves
Nobody can know what your payer will do next year, and the best evidence available is what they did last year. A clean record suggests the payment fits the payer’s budget and comes first when money is tight, while gaps put one or both of those in doubt. The buyer prices that doubt through yield, the annual return they need on what they pay you. A buyer who wants a higher return from the same payments has to pay less for them.
Reasons and proof
Expect to be asked why. A payer who missed two months after a hospital stay and then made it all up reads differently from one who falls short every winter. If you know the reason, put it in a sentence or two and include it with the payment history when you send us the note to price.
The history itself needs backing. Bank deposits or a ledger from a servicer, the company that collects payments and keeps the records for a note holder, let a buyer rely on what you tell them. A spotless history you cannot document may be given less credit than a patchy one you can, so find out how to prove payment history on a note before you put the file together.
What you can do about it
- Tell the buyer up front. Late payments surface during the buyer’s review, and an offer made with full knowledge is far less likely to be cut later.
- Wait, if you can. Every on-time payment after a rough patch pushes the problem further into the past. Buyers call the length of the payment record seasoning.
- Leave the record as it is. Marking a late payment as on time, or quietly covering a missed payment yourself, misstates the note to the buyer. If it comes out later it can put the sale and you at risk, so ask an attorney if you are unsure how to present something.
- Ask about a partial. A buyer taking only the next few years of payments is exposed for less time, so a patchy record may weigh less on that price than on the whole note.
Sell now, or let the record recover
If the late payments are recent and the payer is back on track, selling today means accepting a price built on the worst stretch of the record. Holding the note through a run of clean payments may serve you better if you can do without the cash for now, all the more so when the other factors in what your note is worth, such as equity and lien position, are already strong. A payer who is getting worse points the other way, because the price is unlikely to improve and a sale moves the risk to someone else. Where payments have stopped altogether, the note belongs to the market for non-performing notes, which has its own buyers and its own pricing.
The choice turns on the last twelve months of the ledger. Lay them out month by month, with the date each payment was due and the date it arrived, and the direction the payer is heading will be plain to you before it is plain to a buyer.
Related questions
Can I sell a note if the payer is behind right now?
It can be sold, but it is priced differently. A note that is behind may be treated as non-performing and offered to buyers who specialize in that kind of note. Expect a deeper discount than on a note that is current.
Should I tell a buyer about late payments they might not find?
Yes. Buyers check the payment record before they fund, and sale documents commonly ask the seller to confirm that what they said about the note is true. An accurate record protects the offer and protects you.
Do late fees I collected change the price?
They do not add to it, because a buyer prices the scheduled payments and leaves late charges out. A history of late fees does confirm that payments arrived late, so it becomes part of how the record is read.