Many lending institutions choose to sell their delinquent debt to third-party debt buyers in lieu of recovering these assets on their own or with a debt collection partner.
While there are some advantages to selling debt, the inherent risks and disadvantages of doing so could place your lending institution in a net worse position than holding onto your delinquent assets.
1. Consider Your Options
Debt sales are not always the right choice for lending institutions. If you sell your institution's 'charged off' debt to a debt buyer you immediately lose ownership of that asset and the relationship with the indebted borrower. In turn, the following happens:
- You forego any future opportunities to cross-sell to that consumer.
- You run the risk of permanently damaging your relationship with the borrower making it harder to win back his or her business, as many consumers have a negative perception of third-party debt buyers.
- While you can sell the debt, you can never sell the risk of potential lawsuits associated with regulations like the Fair Debt Collection Practices Act (FDCPA), which could result in financial and reputational damages to your business.
- You lose the opportunity to monetize your assets in the most effective why with a debt sale as the debt is usually purchased by the debt buyer for "pennies on the dollar," whereas collection partners generally return as much as $0.67 of every dollar collected back to the lending institution.
On the flip side, evolving and leveraging your collection and recovery practices in place of selling debts can greatly reduce financial loss risks, while also offering new revenue growth opportunities.
2. Optimize Collections Strategies
The following are practices your institution should adopt to amplify borrower awareness, choice, and convenience for debt repayment, which will very likely result in a higher response rate and fewer outstanding delinquencies.
Evolve your communication strategies.
Think about how you are communicating with borrowers about their outstanding debt(s). The key is to use multiple communication channels to most effectively get in front of and engage with these borrowers.
You can take this one step further by using personalized communications to customize the message in a way that increases engagement and motivates the borrower to take action.
Diversify your repayment options.
Give borrowers more freedom to choose from different loan options so they can select the repayment option that better suits their lifestyle and finances. Doing so will greatly increase the likelihood these loans will be paid on time, which will result in fewer delinquencies and charge-offs for your business.
Non-traditional loan repayment options that could help the borrower include residual based financing, loans with flexible payments, short-term loans, and loan rate adjustments on transferred loans.
Be intentional with your collections efforts.
Be selective about how, to whom, and when you collect debts. This is an essential piece of the puzzle when trying to reduce negative equity and increase returned revenue to your institution. Consider the following when building more intentional collections processes:
- Use reliable data to determine which borrowers present the most risk, and which offer the most reward to help determine to whom and how often you should communicate with each individual borrower.
- Address early stage collections with targeted outreach to preserve relationships with borrowers to get these borrowers back on track so they can take advantage of your other loan products.
- Place more attention and resources on borrowers who have other loans, products, or an account with your financial institution, so that you are retaining and recapturing these high-value consumers.
3. Enlist Expert Support
Working with a full-service debt recovery partner to collect charged-off and delinquent debts on behalf of your institution is one of the best ways to ensure faster and more effective debt recoveries while managing your compliance risk. As such, outsourcing debt collection practices to one of these vendors can help preserve or even elevate your business’s reputation and bottom line.
These recovery partners essentially accomplish the same goals of a debt sale while reducing the inherent risks. In fact, Navient returns an average $0.67 for every dollar of outstanding debt collected on behalf of the lenders they serve.
Practices performed by full-service recovery partners include:
- Performing swift and compliant debt collections
- Providing dedicated customer service on behalf of your business
- Addressing delinquencies that require more time, but often result in less recovered funds
- Following-up on aged collections for those relationships that no longer exist or are deemed a lost cause
- Performing collections post-debt sales on behalf of vetted debt buyers to ensure consistent and reliable collection practices are carried out, should you decide a debt sale is necessary
All-in-all establishing smart collections practices and partnering with a vendor that is experienced in the “art” of debt recovery far-and-away offers more value and benefits to your lending institution than selling your debt to a debt buyer.
Learn more about outsourcing collections.
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