Loans provide borrowers credit lines with a certain amount of money from the creditor. This is under the condition that certain obligations will be fulfilled, including timely payment based on the agreement.
However, things can take an ugly twist when the borrower fails to repay the borrowed principal and other extra charges. Usually, late penalties begin to apply and moves will be made to recover the borrowed funds and other charges.
Depending on the turn of events, debt collection is one of the ways creditors can go about recovering their money. This is by trusting a specialized agency with the task of debt recovery. More about debt collection and refinancing solutions for borrowers facing this financial ordeal will be discussed here. So, read on to find out more.
What Happens Before Debt Collection?
First, the creditor usually approaches the debtor about the need to make due payment. The account of the debtor will then be categorized as delinquent if this does not work. These are the two things that usually happen before this is considered.
Most creditors would not make this move right away. Certain things usually play out before lenders resort to this. Discussed below are usually the things that play out before debt collection:
Attempts by the Creditor
The creditor calls the attention of the borrower to the fact that the loan’s obligations have not been fulfilled. Some of the ways they can do this are by:
- Putting a call through
- Sending out emails
- Sending text messages
The whole point at this stage is trying to get the borrower to pay without involving a third party.
Delinquent Classification
More often than not, this is usually what happens right before debt collection. Late payment and failure to repay creditors usually triggers a certain penalty that increases the loan’s cost.
However, the classification of a borrower’s account as delinquent does more damage. This is especially by adversely impacting the borrower’s credit score.
Such effects lower the debtor’s chances of getting other credit lines or getting better loan terms, especially in the near future. As a result, it is wise to make moves to repay such loans before things get to this point.
What Happens After Debt Collection?
First, a third-party agency charged with the responsibility of recovering the loan gets involved. This agency, which is usually more experienced with debt recovery, usually stands a better chance of getting the debtor to pay up.
However, there are no guarantees as even the agency may not find success at this. Other things can play out afterward, making the ordeal financially messier for the borrower. To provide a better perspective, here is a breakdown of what happens:
Third-Party Agency Gets Involved
Debt collection implies that a third-party agency has been assigned the task of debt recovery. This is a service and it will be paid for. As a result, the borrower will be faced with increased loan costs.
Third-Party Agency’s Effort
Just as the creditor had done in the past, this specialized agency will reach out to the borrower. The goal is to figure out a way to make payments and clear off the debt.
This can be the end of the whole ordeal. This is provided both parties can reach a compromise and the newly agreed terms and conditions are fulfilled by the borrower. However, if a compromise cannot be reached and/or the debtor fails to fulfill expected obligations, then legal measures will be taken.
Legal Action & Settlement
The creditor’s party would be taking legal measures against the debtor if all of the aforementioned moves did not work. This does not always have to end up in a courtroom as issues can be settled out of court.
However, it can as well. At this stage, some of the legal measures that can be taken to recover the loaned amount and other loan costs include:
- Account Seizures
- Property Liens
- Wage Garnishment
For the record, debtors have rights even at this stage and these rights should not be violated. As a result, whatever is done has to be in line with set laws in the given jurisdiction. If you would like to find out how this process plays out in the UK for instance, you can visit: https://www.nidirect.gov.uk/.
Refinancing During Debt Collection
The earlier debt complications are sorted out; the better it is, especially for the borrower. This is especially because fewer or no penalties will be paid. Furthermore, less or no damage will be done to the borrower’s credit score.
For this reason, it is better if debt refinancing is considered before things get to the point of debt collection. However, people in this condition can also take solace in the fact that it is better to consider debt refinancing at this point than when legal action is being initiated by the creditor.
Debt refinancing after debt collection kicks in is certainly not easy but a refinancing loan can still be secured. Discussed below are some measures to be taken to make this happen:
Do a Debt Assessment
The first step to solving a problem is identifying the problem. In this case, you already know the problem – debt. However, it is the extent of the problem that you need to be sure of.
To this end, you should obtain your credit report from a credit bureau. You can even obtain this information from more than one credit bureau to be certain of the extent of your debt problem.
Contact the Collection Agency
Usually, the collection agency does the contact. However, making this move shows that you are committed to solving the debt problem. This could get you on the right track with them and favor you when discussing settlement.
You should do all reasonably possible to repay debt on accounts that have this issue. At least as much as you can. This helps improve your credit score, which will prove very important when trying to secure a refinance loan(s).
Keep Tracking Your Credit Score Progress
Your chances of securing a refinance or any other loan are slimmer without a good credit score. At the point when your account is classified as delinquent, your credit score takes a massive hit and you need to build it back up. This is why you need to do all of the aforementioned.
Furthermore, it is also why you need to keep track of your credit score progress. This is to put you in a better position to not just secure a refinance loan but get very improved terms and conditions.
Consider Joint Application
Most people take out loans as sole borrowers. However, it is possible to get it with a co-borrower. The chances of securing the credit line are even more guaranteed this way.
However, it is understood that people may have reservations about taking out a loan with someone who has this issue. Most people who accept this request are family, spouses, and close friends.
Consider Secured Refinance Loans
Some people in this situation may have properties that can serve as collateral for a refinance loan. Using such a property as collateral increases your chances of being granted a refinance loan.
This is because the credit line will not just be granted on account of your creditworthiness. It will also be granted on account of the value of your collateral.
In Conclusion
These tips shared above are not exhaustive but crucial in getting a refinance loan even if you have a debt collection problem. You can click here for more tips on how to go about this. However, you should also worry about properly managing the refinance loan.
This is to avoid a repeat of the problem. So, ensure that you put the right measures in place. For example, this may involve increasing your debt-to-income ratio by earning from multiple streams and cutting down on your expenses.
