Regarding financial systems, pending loans and debts are never a good thing since it increases the financial risks for the bank. Banks often get help from debt collection systems and agencies to recover the debt. Their sole objective is to make the customers clear their debt on time to avoid further financial problems.
In most cases, the strategy is effective since it incentivizes the borrower to clear out the loans as quickly as possible. But what are bank debt collection management systems exactly, and how do they help in increasing the chances of loan recovery?
This guide aims to answer these questions and more. Read on, then!
What Are Debt Collection Management Systems?
Put, debt collection is a practice where banks or other financial lenders try to collect money that borrowers owe them. This is primarily intended for those failing to clear their outstanding debts promptly. So, if you pay your debts well before the final due date, you don’t have to worry about the debt collection process.
Initially, the bank will try to collect the debt by reminding the customer about the outstanding payments. But if the debt is past due, the bank uses a debt collection management system. Such systems are better equipped to carry out this task than the bank.
Sometimes, the debt collection management system is an automated framework operated partly by the bank. For others, the process is managed by a third-party agency specializing in debt collection.
Debt collection management systems cover different types of unpaid debts, such as:
- Student loan debt
- Car loan debt
- Personal loan debt
- Medical debt
- Credit card dues
- Unpaid utility bills
Regardless of the type or method used, debt collection management systems are highly efficient at loan recovery. This is especially true for automated debt collections and management systems since they minimize human effort and make the process more convenient.
How Does Debt Collection Management Systems Increase Loan Recovery?
To understand how debt collection systems improve loan recovery, you need to know how they operate. On paper, the debt collection process might sound simple, but it is a fairly complex and time-consuming affair.
The bank passes on the borrower’s contact information to the agency, which is used to contact them. For this purpose, the agency may make phone calls, messages, or both. These calls and messages will continue until you pay your debt.
If the borrower still refuses to pay or cannot be contacted, the agency may send field agents to their residence to collect the owed sum.
Alternatively, the collection agency might request the borrower’s banking information to see if they have sufficient funds to repay the debt. They will seek legal assistance to collect the amount as a last resort.
Once the debt is successfully collected, the creditor bank pays the debt collector a percentage of the money in exchange for the services rendered. In that context, some third-party agencies may choose to buy out the debt from the bank, after which they will pursue the borrower for the money owed.
A similar procedure is followed in the case of an automated debt collection management system. All the calls and messages are automated, and the payment methods are digitized, making it convenient for the financial institution and the borrower. However, it requires little to no manual effort, which makes the debt collection process faster for creditors.
Fairness Of The Debt Collection Process
While debt collection management systems and agencies have a higher loan recovery rate, there are concerns about the methods’ fairness. So, to prevent borrowers from being harassed or threatened, the Fair Debt Collection Practices Act was formulated.
As per the act, debt collection agencies and management systems must follow an ethical procedure to collect the debt from borrowers. They cannot use unfair, deceptive, or abusive practices to coerce the borrower into paying. For example, they cannot pretend to be law enforcement officers and intimidate you. Neither can they publicize your debt to humiliate or embarrass you.
Likewise, they need to verify the debt by collecting accurate information. This ensures they do not go after someone who does not owe any money. Also, the debt collection management systems cannot send calls or messages to you beyond a certain time unless you provide express permission.
If the debt collection agency or system breaches the above regulations, you can file a complaint with the relevant authorities.
How To Deal With Debts?
We understand that dealing with debt collection management systems can be a harrowing experience, even if the collection agency or design follows fair practices. This is especially true if you are going through a financial crisis. However, you can manage your debt if you follow the steps below.
1. Verify Your Debt
Before you pay, verify the debt and the amount with the creditor’s bank. If you owe the bank, a validation letter will be issued with all the debt details.
2. Explore Payment Options
Explore suitable payment options depending on your available funds and the amount owed. You can either make a lump sum payment or a repayment plan. In the case of automated collection systems, you can clear your payments digitally for convenience.
3. Make The Payments
After you have chosen a payment method, you can start clearing the debt. You should ask for a written agreement from the debt collector to be safe.
Clear out your debts and loans on time is always a good practice. That way, you can avoid getting targeted by debt collection management systems altogether. Also, it prevents your debt amounts from ballooning, ultimately costing you more in the long run.
Besides, your bank will appreciate it if you pay off your loans on time. It increases your credit scores, which makes it easier for you to get loans in the future. Thus, it is advantageous for all parties involved.