With a strong economy and an increase in jobs and wages, consumers have more confidence when it comes to their spending habits. These spending habits have impacted the number of loans that lenders are offering to borrowers. While this opens up opportunity for more business, it also increases the risk that lenders face.
For lenders, collecting on delinquent accounts can be an expensive proposition. Especially since, as we know, the more delinquent an account becomes, the smaller the chance you’ll be repaid at all.
Statistically speaking, financial institutions will see repayment from only 20% of accounts that have been delinquent for more than 180 days, according to The Credit Research Foundation. Your state decides on the amount of time your credit union may use to pursue collection of a debt before you must stop reporting it as an asset and write it off as a loss, often giving up hope of collecting anything at all.
Unexpected Costs of Collecting on Past-Due Accounts
Unfortunately, when it comes to collecting on delinquent accounts, the unpaid debt is not the only cost that lenders incur. Here are some other expected costs of having to collect on a delinquent account:
- Reduced (possibly zero) reimbursement for losses
- Lost interest and fee income
- Lost future deposit, investment, and loan relationships from debtors in default
- Vendor costs for collections
- Attorney and court fees
- Background check fees as the institution works to avoid risky debtors in the future
Credit unions that are unsuccessful at collecting on an overdue account have a few options:
- Employ an outsourced collections vendor for assistance
- Sell the debt to a debt buyer
- Pursue a legal judgment in court
- Report the unpaid bill to credit bureaus to warn others of the debtor’s history
The Benefits of Outsourcing Your Collections Activity
Lenders must be prepared with a well, thought-out plan to collect on delinquent accounts. While many lenders opt to keep their collections efforts in-house, there are numerous benefits to outsourcing collections. Outsourcing collections allows credit unions to shift their previously committed focus to:
- Expand on areas with potential growth and focus on the overall strategy to increase their bottom line
- Eliminate resources focused on back-office processes and utilize that time on efforts that build and grow customer relationships
- Allow employee growth by opening more opportunity to focus on specialized areas other than collections
Outsourcing collection efforts can be a game changer for many credit union. Whether it be all or a portion of their collections, outsourcing allows lenders to increase their productivity and reduce costs. It can cost a third-party collections team five to 10 times less to collect a dollar than it would cost your credit union.
When weighing the benefits of reducing collections costs and still meeting your goals of reducing delinquency and charge offs, consider comparing the costs and benefits of in-house vs. outsourced collections strategies with our collections comparison guide.