A collection agency is a financial establishment that helps lenders of all kinds recover their funds after a loan has defaulted. For most lenders and creditors, a collection agency is their last resort after attempting multiple times to reach out to their borrower for payments without any success.
Collection agencies are independent third parties that a lender/creditor uses to recover their funds. Some lenders or creditors may choose to handle this job themselves, and some may outsource it.
When a collection agency is hired, they begin the task of collecting the funds.
Generally, there are two kinds of collection agencies out there:
Regardless of what type of collection agency you are working with, their methods are usually the same.
Before your outstanding balance is sent to a collections agency, your original lender or creditor will reach out to you with warnings and give you multiple chances to get payments going again.
Once a collection agency is handling the debt, you will get a letter in the mail or another form of contact stating so. From this point on, any payments you make will have to be through that third party.
If a collection agency cannot contact you, they can reach out to your work, friends or family, and even show up at a physical location.
However, they cannot disclose any of your personal information to anyone, threaten you or anyone you know, or call you at unreasonable times (at home or work).
Once contact is established, they will try and come up with a repayment plan with you.
If your outstanding debt is sent to a collections agency, the repayment process may be a little different than it was with your original lender. Here is what a collection agency will ask about to establish a payment plan:
When working with a collection agency, you may have a specific individual that handles your account and can continue communication with you.
Regardless of your situation, it is essential to keep in mind that you never have to agree to something beyond your means and that you have rights as a consumer. It is also crucial to verify your collection agency and debt before making payments or giving out any confidential information. You can verify whether any of your accounts are in collections by checking your most up-to-date credit report from any of the three major credit bureaus.
As a financial enterprise, collection agencies report to all three of the major credit bureaus. Having a balance with a collection agency will hurt your credit score. This is why it’s essential to understand your credit score and how it works.
If you cannot repay a loan to the collection agency, it will be reported on your credit report. This will show up as a collection status.
Unfortunately, this status will mean a significant drop in your credit score and prevent you from taking out a new loan or credit card. Additionally, a collection status will remain on your credit report for seven years.
As mentioned above, having an account in collections can leave an impact for many years. However, the sooner a debt is paid off, the sooner your score will improve. Paying your collections account can also protect you from things like having to deal with other companies, paying more in fees and interest, and even legal actions from a collector.
The simplest way to prevent your account from going into collections is to make those monthly payments on time. For those who are struggling financially, it will be critical to be transparent with your lender.
In many cases, a lender may pursue working out a more flexible payment plan or provide additional options rather than passing on your account to a collection agency.
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