Collection Agency

Financial Dictionary -> Debt -> Collection Agency

A collection agency is a business that is hired by a lender or other financial institution in order to collect debts from borrowers. For example if a borrower defaults on their loan by not paying 2 month's worth of payments; before further legal action is taken the lender may hire a collection agency to go and collect the outstanding debts. The lender will give the collection agency a percentage of the collected money in order to pay for their services.

A collection agency can be hired for all kinds of different defaulted loans, whether it's a personal loan, mortgage, unpaid fines (such as parking tickets), overdrawn bank accounts (whether personal or corporate) and virtually any other kinds of debt.

It is very common for lenders to sell debts to collection agencies at a fraction of the price to cut their losses and move on. The collection agency will then do everything in their power to collect the full debt amount in order to make a profit. This is one of the main aspects of their business model.

There are two kinds of collection agencies. A first party agency is usually just a department of branch of the original lender and therefore remains civil in the situation. They will intervene early on before outsourcing the problem elsewhere.

Third party agencies are independent businesses that take on the debt from the original lender and possibly buy out the debt to pursue it by themselves.

Tactics are governed and aren't ever supposed to be violent or over threatening. The first action a debt collection agency might do is send out a series of red letters warning the borrower that they need to pay before further action is taken. They will often reiterate that they will get a bad credit rating and will find it hard to obtain loans later on if they don't pay.