In the subprime market, loan collectors often face the difficult decision of whether they should be collecting partial payments from borrowers. On one hand, it can be seen as a way to recover some funds and potentially improve the borrower’s financial situation. On the other hand, there are risks and downsides associated with this practice. ABCoA’s Flagship Software, Deal Pack, can handle whichever your business decides.

Pros of Accepting Partial Payments

Increased Chances of Recovery:

One of the most significant advantages of accepting partial payments is that it increases the likelihood of recovering at least some of the owed money. Borrowers who are unable to make full payments may still be willing and able to make partial payments, reducing the overall debt.

Maintaining a Positive Relationship:

Accepting partial payments can help maintain a more positive relationship between the borrower and the lender or collector. By demonstrating flexibility and willingness to work with the borrower, it may be possible to foster cooperation and avoid legal disputes or hostility.

Immediate Cash Flow:

Collectors can improve their immediate cash flow by accepting partial payments. While this may not fully satisfy the debt, it can provide some liquidity that can be used for operational expenses or reinvesting in the collection process.

Compliance with Regulations:

In some jurisdictions, there are legal requirements or guidelines that encourage or mandate loan collectors to consider partial payments as part of a fair and ethical debt collection process. Complying with these regulations can help collectors avoid legal issues.

Cons of Accepting Partial Payments

Prolonged Debt Recovery:

One of the most significant drawbacks of accepting partial payments is that it can prolong the debt recovery process. By allowing borrowers to pay less than the full amount, it may take longer to recover the entire debt, especially if borrowers continue to make only partial payments.

Risk of Strategic Default:

Some borrowers may strategically default, knowing that they can negotiate partial payments without facing more severe consequences. This can create a moral hazard, encouraging borrowers to default on their obligations.

Opportunity Cost:

Accepting partial payments may mean that collectors miss out on opportunities to pursue more profitable accounts or allocate resources to more effective collection strategies. It may divert resources away from accounts with higher recovery potential.

Administrative Overhead:

Managing and tracking partial payments can be administratively burdensome. Collectors must keep detailed records, communicate with borrowers, and ensure that partial payments are properly applied to the outstanding debt.

The decision of whether to accept partial payments as a loan collector is a complex one with both advantages and disadvantages. While accepting partial payments may increase the chances of recovering some funds and maintain a positive relationship with borrowers, it also carries the risk of prolonging debt recovery, encouraging strategic default, and diverting resources from more lucrative accounts. Ultimately, loan collectors must carefully weigh these pros and cons and consider their specific circumstances, including legal requirements and the overall impact on their collection efforts, when deciding whether to accept partial payments from borrowers.