Collections in consumer lending

In consumer lending, collections refer to the various activities that debt collectors, either internal of a lender or external collection agencies, use to encourage debtors to repay accounts. This may include sending instant messages, making phone calls, sending letters and emails, visiting the debtor's home or place of work, and even taking legal action. The goal of collections is to get the debtor to repay the debt and to do so in a timely manner.

There are a few different stages in the collections process of consumer lending:

  • Pre-collection
  • Soft collections
  • Early collections
  • Late collections
  • Legal collections

Usual time difference in stages

The stage of the collection depends on the days from the payment date.

Pre-collections usually happen between 3-0 days before the repayment date. Usually, only accounts that have a high probability of late payment are approached at this stage.

Soft collections are referred to the stage where an account may have fallen into collections due to technical trouble with payment and not directly due to the customer being in actual credit default. This can be anywhere from 1-5, 1-10, or 1-14 days past the due date.

Early collections are when an account becomes delinquent and is generally right after the day considered as past the soft collections. Usually, 14-60 days late.

Late collections are when an account is generally 61 days or more delinquent. This stage usually ends when an account becomes a non-performing loan.

Legal collection usually starts when an account has become a non-performing loan.

The starting point of each stage can differ based on a lender’s collection and debt recovery policy.

Inhouse collections or outsourced?

Inhouse collections are when the lender has their own internal collections team to manage and collect on delinquent accounts. This team is often made up of in-house employees who report to the head of collections. Many times, lenders will outsource their collections to third-party collection agencies.

There are a few benefits to having an in-house collections team. The first benefit is that it reduces the cost to the lender. When a lender outsources their collections to a third-party agency, they are often charged a contingency fee, which is a percentage of the amount collected.

The second benefit is that it increases the likelihood of successful collections. When a lender uses a third-party agency, they are often working with a team of collectors who are not familiar with the lender's customer base. This can lead to collectors using aggressive tactics that may turn the customer off and make them less likely to repay the debt.

The downside to having an in-house collections team is that it can be more difficult to scale up or down as needed. This is because the team is made up of full-time employees who may not be able to work overtime as needed during peak periods. Additionally, the team may not be as productive during slower periods, which can lead to higher costs for the lender.

Due to the costs of collections, usually, the initial stages - pre-collection, soft collections, and early collections are handled in-house. Later stages are usually outsourced.

Initial stages can be also outsourced due to capacity issues or for the purposes of benchmarking in-house performance.

What are some common collection strategies?

Some common collection strategies used in consumer lending are instant messages, phone calls, letters, emails, and visits.

Instant messages are a relatively new tool that collection agencies are using to reach debtors. This method has a high response rate, as most people will read a text message within a few minutes of receiving it. These messages are often used to remind the debtor of an upcoming payment or to provide information on how to make a payment.

Phone calls are the most common method of contact for collections agencies. These calls are often used to remind the debtor of an upcoming payment or to provide information on how to make a payment. Debtors may also be asked about their ability to repay the debt and set up a payment plan.

Letters and visits are mainly formal collection techniques informing the customer about the seriousness of the situation. Letters are also used to inform the customer about their account being passed to a collection agency or their account being sold to a different part.

Email is considered a soft touch point and is used for mostly for reminders or updates on the account.

What are some common mistakes made in collections?

One common mistake that is made in collections is failing to understand the customer's ability to pay. This can lead to collectors using aggressive tactics that may turn the customer off and make them less likely to repay the debt.

Another common mistake is failing to properly document communications with the debtor. This can lead to the debtor claiming that they were never properly contacted about the debt, which can hamper the collections process.

Finally, collectors may also make the mistake of calling the debtor too frequently. This can lead to the debtor feeling harassed and may make them less likely to repay the debt. Too frequent phone calls can also lead to the involvement of regulatory bodies and potentially can end up in fines to the lender or in a PR issue.

What are some common challenges in collections?

Some common challenges in collections include:

  • Selecting properly best technique and way to communicate with each borrower
  • Finding the right balance between aggressive and soft collections tactics
  • Properly documenting communications with the debtor
  • Knowing when to pass an account to a third-party collection agency
  • Minimizing regulatory risk
  • Ensuring compliance with applicable laws and regulations

What are some common solutions to collections challenges?

Automating collections segmentation, scoring, and prioritization using regular batch processing using an ETL or a decision engine.

Using a customer relationship management (CRM) system to track communications with the debtor.

Restricting the number of phone calls made to each debtor (so-call spin-rate).

Using a third-party collection agency for accounts that are difficult to collect.

Developing policies and procedures to ensure compliance with applicable laws and regulations.


In conclusion, collections are the process of pursuing payments on delinquent accounts. This process typically starts with a gentle reminder and gets progressively more aggressive as time goes on. There are a number of different strategies that can be used in collections, and the most effective strategy often depends on the customer's ability to pay.

If you are having difficulty collecting on a delinquent account, there are a number of solutions that can be considered, including outsourcing to a third-party collection agency.