Collection cost definition:
A collection cost is a cost incurred to recover a loan or debt through a legal process. For example, a collection cost could include expenditures for hiring a collection agency. Some contracts and regulations prescribe liquidated damages for collection costs.
What does the collection costs include?
- Commissions for Collection Agency.
- Fess for Attorney.
- Court-oriented Expenditure.
- Telephone Calls.
Collection cost agency
Collection agencies use a contingency payment model, and they charge clients only if they successfully collect money. The average fee ranges from 25 – 50 percent of the total amount of debt collected per account. So, in many cases, the Collection Agency adds a flat fee rather than dissected expenses.
When an individual opts for borrowing money/ credit, he/she usually sign an agreement to repay the money borrowed with interest. All the agreements include strict provisions outlining the lender’s consequences if the borrower doesn’t pay the debt as per the Contract.
In the same Contract, it is usually laid down that the lender will bear all the costs in attempting to collect the unpaid debt.
How will a lender identify a defaulter?
One late payment doesn’t lead the creditor to declare the loan in default.
Generally, two consecutive payments need to be missed to declare the borrower as a defaulter and trigger the collection process.
How does the entire process work – Example of Collection Cost?
After labeling the borrower as a defaulter, the creditor sets up a contract with a Collection Agency.
The Collection Agency keeps track of the incurred expenditures involved in collecting the debt through the legal process.
Next, if the Collection Agency fails to retrieve the debt/loan, the lender will step in and refer the case to an attorney.
The attorney will further use the threat of a lawsuit to persuade the borrower regarding payment. Generally, the attorney has the right to negotiate with the debtor. Note that the amount under negotiation is the total amount owed to the lender, including the collection costs.
If the case drags to the court, there remains no room for negotiation for the payments. Moreover, if the lender wins the case, the court orders the debtors to pay the entire amount owed to the lender, including the attorney fees and court costs.
After leaving Wells Fargo Bank in 2014, Daniel began a career as a finance consultant, advising companies and individuals on economic policy, labor relations, and financial management.
At Promtfinance.com, Daniel writes about personal finance topics, value estimation, budgeting strategies, retirement planning, and portfolio diversification.
Read more on Daniel Smith's biography page.
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