News & Resources

In House Collections Versus Using 3rd Party Collections Agency

Dec 20, 2010 Kyle Duncan

During any economic cycle, a certain amount of bad debt is just part of doing business, but in the current economic climate, lending has become more challenging.  If you are a creditor and you are struggling to recover money on bad loans, you may be asking yourself "should I try to recover on the loan using my in-house staff or should I work with a third-party collection agency?" Of course there are some advantages and some disadvantages for both options.

An in-house debt collection department often referred to as first-party debt collectors, can offer some advantages over a collection agency because it is possible to act more rapidly on delinquent accounts.

Since contingency costs for third party collection agencies range from 15 to 40 percent, in-house collections can mean more of money in your pocket, provided you are successful in recovery on the delinquent accounts.  Since in-house collections allow you to better manage the customer relationship throughout the recovery process, an in-house collections department also gives you far better opportunity to retain your customers, provided they are worth keeping.

Setting up a first-party debt recovery program is not a small task and requires a good deal of investment. To be effective at in-house collections requires a solid infrastructure, a well-managed process and access to accurate consumer information to assist you in locating the debtor and the debtor's assets.

A third-party debt collection agency is not directly involved with the issuing of credit.  This independence can often make third-party debt agencies more effective than in-house debt collections because the collection agency's sole purpose is to recover as much of the debt as possible.

The rate and method you pay a third-party debt recovery company can vary greatly and depends on the service agreement between you and the agency. In some cases, the third-party agency will be paid a contingency fee - a commission on any debt they recover.  In these cases, where the debt collector only gets paid when they recover the assets, there is a higher incentive to provide efficient and effective service, which can result in higher conversions for you.  In other cases, the third party debt collection agency may be willing to buy your delinquent debt and taking the risk of recovery on the debt portfolio.

Partnering up with a third-party collection agency also frees you to focus on your core business operations and reduces your overhead by eliminating the cost for staffing and training.