|Common circumstances rather than conscious delinquencies cause many customers to default on their automobile payments. This is something that sets automobile dealer delinquent accounts apart from any other type of collection account, such as retail or service debts. The most common reason that customers default on auto loans is employment termination, voluntary or involuntary. In the case of involuntary, unemployment benefits are either not available or not enough for them to sustain payments.|
Another common cause for delinquency is when customers suddenly incur unexpected expenses due to major health issues or vehicles requiring major vehicle repairs. If customers were already struggling to make payments, they cannot make the payment AND pay for medical attention or repairs.
If one of these circumstances arises and customers feel as though you are not working with them, they may file bankruptcy or stop all communications with your credit department if they are already drowning in debt. Lack of communication is a red flag indicating that you should immediately pursue the account legally or place it with a collection agency. Before you get to this point, however, you need review the basic principles of granting credit.
As a credit grantor, your business is one of many that allow consumers to use goods and services immediately and pay for them later. While extending credit increases your gross sales, it also puts you at risk of some losses due to nonpayment.
Quite often a debtor will stop paying for their vehicle if the vehicle stops running or needs repairs. You should work with your customers to minimize vehicle down time so they continue to make their agreed upon payments. I have seen instances where the customer will not pay parking or other tickets, and the police will impound the vehicle. These debtors feel that they are no longer obligated to pay you if they are not in possession of the vehicle. In these cases, at least you know where the collateral is and how to redeem it before pursuing further collections.
To increase the odds of collecting a past due account, place the account with a collection agency sooner. The longer you wait, the slimmer the chances of collecting any part of the outstanding balance.
You can keep bad debts to a minimum and have more success recovering them if you identify them early. Early identification means reviewing your accounts on a regular cycle, at least weekly if not daily, to quickly identify those that are not paying as agreed. Review their credit file again, and their payment history to determine if you have an actionable problem. Your reaction at this point of your credit-collection procedures can mean the difference between recovery and loss. If you identify a potential bad debt, you need to act promptly and decisively according to your established credit and collection procedures. Usually the more time that passes, the less consumers pay.
Reducing Bad Debt
You should have a standard, in-house written policy on handling accounts. The policy should include when to call new customers, when to call established customers, when to send letters and when to turn accounts over to other collection sources.
None of these consumers are our main concern. They are mentioned only to emphasize a simple, fundamental collection practice which is to keep the account current. This can usually only be achieved by giving each account proper and constant attention.
A successful in-house policy must:
Proper and consistent attention involves developing a collection schedule and following each step fully before moving on to the next step. It means that you never move backward or repeat a step with hopes of salvaging an account.
When to Hire a Professional Collector
As an account ages, the chances of collecting on it decrease dramatically. It's expensive to carry accounts that you will not be able to collect using the methods at your disposal. It's often a better use of your company's time and resources to concentrate on other aspects of your business.
Here are some signs that you may need to work with a collection agency:
Selecting a Qualified Agency
You should choose a qualified professional collection agency to manage delinquent accounts. The agency should represent your organization in a responsible and professional manner, and provide a satisfactory rate of recovery while maintaining your public image. This decision involves more than just giving your business to the lowest bidder. Consider the following qualifications and credentials when choosing a collection service:
Working with a Collection Agency
Cooperate with your collection service. Rely on the experience, diligence and judgment of your collection service for the best and quickest results. Relay any developments on the assigned accounts to the collector promptly. Do not place an account with more than one collection service. If you change collection agencies make sure that the account is only being worked by one service.
Minimize your risk by implementing the proper underwriting techniques and complete in-house collection procedures. Then, maximize your bad debt collection potential by carefully selecting a collection agency and turn accounts over to them in a timely manner.
Vol 4, Issue 3
Lending Tree’s most recent auto finance snapshot finds originations, amounts financed, and monthly payments all accelerated in 2018.