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Selling a debt to a collection agency: why lenders do it

Unfortunately, many borrowers, despite their best intentions, will end up being unable to pay a loan, credit card or store account back. Rather than come to a suitable arrangement with the lender, many borrowers ignore the reminders and final demands. This leaves the financial institution with little choice but to consider selling a debt to a collection agency.

Most lenders will hire the services of an independent collection agency to collect their bad debts on their behalf. Although some will have their own collection agents, many of the bigger names banks and building societies recruit independent in a bid to preserve the customer relationship. Independent agencies also tend to have more success in getting the debt back as they have the resources and man power to pursue it properly. Before selling a debt to a collection agency the lender will make sure they have pursued every avenue open to them with regards collecting the debt themselves.

When a debt is sold to a collection agency the bank loses money. This is because, in order for the agency to make money, they purchase the debt from the bank at a cheaper price. For example, a debt of £5,000 may be sold for as little as £2,000, with the collection agency keeping the difference as their fee when the money is paid back. Lenders are willing to sell the debt on at a loss because the little money they do get for it is more than they had before the sale. It also saves them money in man power and administration fees, as they are no longer chasing the debtor themselves.

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