Selling note payments to clear a debt makes sense when the debt costs you more each year than the sale does, and when you sell only enough to cover it. Where the payer’s record allows it, that points to a partial sized to the debt and away from a sale of the whole note.
If you hold a note and also owe money, you are lending at one rate and borrowing at another. Of the reasons a note holder might sell, debt is the one that can be checked with arithmetic: find out whether that gap is costing you, and then size any sale so you give up no more of the note than the debt requires.
The comparison that matters
Start with the rate on your debt, meaning what the lender charges you each year. It is on your statement.
Set against it the yield the note buyer prices at. A buyer pays a lump sum today for payments in the future, and the yield measures what those payments earn the buyer on that sum each year. From your side of the table it is roughly what the cash costs you, because you are handing over future payments that add up to more than the lump sum you receive.
The rule of thumb follows directly:
- If the debt charges well above the buyer’s yield, converting note payments into a payoff is likely to save you money.
- If the debt charges below the buyer’s yield, you would be giving up more than you save. Keep the note and pay the debt from the monthly payments.
- If the two are close, the decision turns on other things: risk, simplicity and how the debt is secured.
You cannot know the yield in advance, since a buyer sets it after looking at your payer’s record, the equity in the property and the note’s terms. The figure for your own note comes with a quote: when you send us your note details, the yield behind each offer is shown on its worksheet.
Size the sale to the debt
The discount applies to whatever you sell. If you owe $30,000 and sell an entire note with a far larger balance to pay it, you have taken a discount on the whole balance to solve a problem a fraction of that size.
Using a partial to cover a specific cash need avoids this. The buyer pays you a lump sum for a fixed run of the coming payments, and once those have been collected the note is assigned back to you and the payer pays you again.
Here is how to read an offer of that kind, using round figures as an example. You owe $30,000. A buyer offers $30,000 today for a run of payments that would have added up to $34,000 as they came in. The $4,000 difference is what the cash costs you. Now work out the interest the debt would charge over the same period if you left it in place and paid it down from the note. If that interest comes to more than $4,000, the partial leaves you ahead, and if it comes to less, the debt was the cheaper thing to keep.
Example only. The figures are invented to show the comparison and are not a price for any note.
Selling the whole note for the same debt would leave you holding a large sum you had no plan for and would end the income for good, which is a separate decision that the debt cannot justify by itself.
Which debts are worth it
| Kind of debt | What to weigh |
|---|---|
| Credit cards and other high-rate unsecured debt | The strongest case where the rate is high, because the balance grows if you only pay the minimum |
| A tax bill | Penalties and interest add up, and tax authorities have strong collection powers. Ask a CPA what you actually owe before raising money for it |
| Medical debt | Ask the provider about a reduced balance or a payment plan before you sell anything. The amount may be negotiable |
| A car loan or personal loan | Depends entirely on the rate |
| Your own home mortgage | Paying it off is tidy, but if the rate is low, compare the numbers before giving up note income for it |
| A loan against the property you sold | A special case, covered next |
If the debt sits behind your own note
Some sellers still have a mortgage of their own on the property they sold with financing. The payer pays you, and you pay your lender, an arrangement often called a wraparound. A buyer of your note has to account for that underlying loan, because it comes ahead of your note against the property.
A sale can be structured so that the underlying loan is paid off at closing from the proceeds. Tell the buyer about the loan at the start, because it changes the pricing and the paperwork.
What selling will not fix
A sale deals with a balance and leaves the reason the balance built up where it was. If spending is running ahead of income, clearing the cards with note money buys time, and when the time runs out the note is smaller or gone.
Debt from a single event, such as a medical bill or a repair, is solved by paying it off. Debt from a monthly shortfall is different, because selling payments reduces your monthly income for the length of the partial and can make the shortfall worse.
Alternatives to check first
- Pay the debt down from the note’s payments. If you can direct the monthly check at the balance, you keep the whole note and still clear it over time.
- Ask the creditor. Hardship plans, lower rates and settlements exist, and the call costs nothing.
- Refinance the debt. A lower-rate loan may be available to you, and its rate can be compared with the note buyer’s yield in the same way.
- Borrow against the note. Some lenders will lend with a note as security, though it is less common and has risks of its own, so weigh a partial sale against borrowing against your note before you treat a loan as the cheaper route.
A partial differs from all forms of borrowing in being a sale. There is no monthly repayment to keep up. What happens if the payer defaults on payments you have sold is governed by your agreement with the buyer, so read that section of it before you sign.
Tax
Selling payments can change how much tax you owe and when. If the result is a tax bill, that is part of the cost of clearing the debt and belongs in your comparison, so ask a CPA to run it before you accept an offer.
The figure to bring with you
List each debt with its balance and its rate, and strike out any that charge less than a note buyer is likely to want. The total of what remains is the amount to raise. Give that total to whoever prices the note, along with the highest and lowest rates on the list, and ask for the smallest partial that raises it, if the payer’s record supports one. Then hold the yield behind each offer against those rates line by line. A yield above your debt’s rate means keeping the note is the cheaper choice.
Related questions
Is it better to sell my note or take out a loan to pay off debt?
Compare the rate on the loan with the yield a note buyer would price at. The lower one is the cheaper source of cash. A sale also leaves you with nothing to repay, which matters if your income is uncertain.
Can I sell just enough of my note to cover one bill?
Often, yes. A partial sells a set number of upcoming payments, and the number can be chosen to raise a specific amount. Buyers have minimum sizes they will consider, so very small amounts may not be practical.
Will creditors be able to take my note if I do not pay?
That depends on the kind of debt, whether there is a court judgment and your state's law. A note is an asset, and assets can be reached by creditors in some circumstances. Ask an attorney about your own position.