Best Debt Collection Practices
There are several reasons that borrowers become delinquent in their accounts. Ultimately, in the months to come, maintaining a positive customer experience must be a priority, especially in the face of this unique period of credit troubles.
Here are a few steps and practices to consider when collecting debts:
Be Proactive Rather Than Reactive
LoanCirrus integrates into external credit agencies in real-time to ensure creditworthiness before extending a loan, therefore reducing the risk of delinquencies.
Stringent, well-established accounting schedules will pick up on a late account well before it reaches the critical 90-day period when collection becomes far less likely. Good accounting practices will also enable the identification of recurrent delinquency. LoanCirrus assists by allowing lenders to view at a glance their relationships with their borrowers.
LoanCirrus not only tracks when loans have become delinquent, but also has a report showing loans that will become due shortly so you can proactively reach out or automate reminders to customers. By contacting customers as early as possible, there will likely be a wider range of available options for handling any problems that may arise before late fees and interest charges escalate.
As repayment dates pass, prepare to contact borrowers. Some clients may be able to make payments over time. Try to work out a plan that will work for the company and your customer. The goal is to get the customer to pay the entire debt as quickly as possible.
Also, see our blog on Handling Borrowers’ Concerns during COVID-19.
Take Advantage of Online Tools
As lenders, it is vital to establish and use a seamless and secure digital platform for the company’s loan management and debt collection process.
LoanCirrus Intelligence/Reporting systems will ensure you know exactly what is in arrears so you can be effective at debt recovery. With one standard system in place to record when credit is extended, the amount, and when the payments are due, it is hard to go wrong.
Additionally, when you utilise Loan Cirrus’ add on service REACH your customers will be able to view the status of their loans— how much is owed, how much has been paid, the balance, and the date each repayment is due. REACH helps your customers track and manage their loans to decrease the likelihood of delinquencies. Most importantly, REACH is fully integrated into LoanCirrus (or can easily be integrated into your lending platform) which manages and services your loans.
Among other tools and features, LoanCirrus allows lenders to assign loans to a debt collection agent or agency as may become necessary. Check out our blog post: Top 7 Must-Have Loan Collection Tools & Features.
Be Aware of Debt Collection Acts and Policies
Debt Collection legislation may vary according to the territory, though there are similarities across the board. Be sure you and your employees are compliant with the governing bodies in your country.
Although lenders are legally entitled to attempt to collect all owed debts, the methods that can be employed by US lenders are restricted by the US Fair Debt Collection Practices Act. The Act states that it is illegal for debt collectors to use any abusive, unfair, or deceptive practices when they collect debts.
In addition, the Australian Competition and Consumer Commission and Australian Securities and Investments Commission encourage creditors to be flexible, fair and realistic in their approach to debt collection. This includes recognising when borrowers are vulnerable and/or experiencing financial hardship, due to issues beyond their control such as acts of God, unemployment, a serious illness, or family breakdown.
While digital communication channels are immense assets, there are also policies that guide lenders’ communication with delinquent borrowers. In many countries, there are guidelines that lenders should seek to prevent any humiliation of borrowers, and should be reasonable in how they assess a borrowers’ financial situation, in order to negotiate an agreement.
In the United States, the Consumer Financial Protection Bureau in 2019 proposed that debt collectors should be able to call borrowers up to seven times a week, including texts, emails and private messages about outstanding debt.
Do you know the legislation surrounding debt collection in your country? Are your company’s policies in keeping with these guidelines?
Communicate Clearly With Customers
Lenders need to judiciously determine the balance between human interaction and artificial technologies, automating wherever possible.
When it comes to collecting your money, you should be firm yet polite with your customers— after all, your business depends on this cash. And your customers will realise and respect this.
In a report by global professional services firm Genpact, “Banking in the Age of Instinct,” it is predicted that to survive and thrive, financial institutions would need to shift from being authoritative and functional to being more supportive and emotional.
Before you make personal contact with a delinquent customer, make sure you are prepared. This includes having on hand copies of all invoices, contracts, and any other information that will help you speak knowledgeably, professionally, and personally with the customer.
Be careful with your tone and your words, yet confident when you are speaking and be prepared for their responses— whatever they may say.
Borrowers should not feel threatened, but instead, feel the urgency and realise the benefits of settling the loan. So, try to keep the communication as relaxed as possible, even if the client becomes abusive during the contact. If this happens, you should suggest calling back at another time.
Tip – The tone you take can impact how successful the conversation will be. If you start the conversation with a friendly, non-confrontational tone, the customer may respond more positively.
Whatever the outcome, it is vital during these conversations that you keep a record of the conversation, including any agreed action, for follow-ups.
Balance collecting debt with retaining customers
To collect outstanding debts, lenders should employ collection strategies that are carefully balanced with customer service and retention strategies. The incorrect handling of a debtor could easily lead to losing a valuable customer in addition to more difficult or extended repayment periods. However, the long-term benefits of maintaining a high-value customer could far outweigh the short-term benefit of higher collections rates.
Understanding the factors that play into your customers’ satisfaction, especially during the nerve-wracking collections process, is essential for developing a customer retention strategy that’s right for you.
Strengthening quality control is the perfect place to start. Usually, when people think about quality control concerning collections, they think of regulatory compliance. But quality control refers to the commitment to providing a quality customer experience regardless of an account balance or how many days past due.
The fact that the balance is outstanding should not, on its own, be used to label a customer as ‘not worth retaining.’ The most important value is not the current value but the potential lifetime value of a customer.
Despite the difficult economic times, debt collection is integral in the lending business. Using these collection techniques should increase your odds of success.