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, there also numerous benefits to not selling your delinquent assets.
Let's break this down a bit further.
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. As such, you may want to consider the following as a potential result:
- You may forego any future opportunities to cross-sell to that indebted consumer.
- You open yourself up to potential legal risks related to regulations like the Fair Debt Collection Practices Act (FDCPA).
- You forego the opportunity to monetize your assets in potentially more effective and lucrative ways, i.e. consulting with a debt recovery partner.
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.
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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 debt collections strategies can open up a multitude of new benefits to your lending institution, so it is important you take the time to think through debt recovery practices beyond selling debt.
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