The Role Third-Party Debt Collection Plays in the US Economy #7

Debt Collection and Consumer Credit Availability (Con’t)

Research shows that a system with lenient regulations on debt collection and an efficient debt collection system facilitates the supply of consumer credit and allows for lower interest rates. High-risk consumers, in particular, need this dynamic because this environment in which a lender is able to use the post-default collection to mitigate their losses makes it easier for them to get affordable credit.

As credit is offered based on assessing risk and the potential for a borrower to repay the loan, not every consumer has equal access to credit (Ratcliffe, et al. 2014). Borrowers that are deemed a high risk will generally fail to find credit or be offered it at a rate they are unable to afford, especially in the case where a lender is not satisfied with the ability for a borrower to repay the loan. A debt collection industry allows for lenders to offer credit to a high-risk borrower as the potential to recover losses following default compensates for a higher chance of defaulting (Fredaseyeu and Hunt, 2014, p. 27). Those high-risk borrowers are also likely to benefit from a reduction in interest rates and the increased supply of credit for riskier borrowers afforded by an increase in recoveries after loan defaults. (Zywicki, 2015, p. 51).

As a result, debt collection allows lenders the freedom to provide the client with a wider – and potentially riskier – market that would normally not be allowed access to credit (Fredaseyeu, 2014). This is great for a low-income consumer particularly because they may try and find alternative sources of credit that may be more expensive or require collateral if they are rejected by traditional credit markets (Zywicki, 2015). Because debt collection allows lenders some security and provides them with a way to mitigate their losses, it allows for the creation of a marketplace wherein more people in different income categories with varying credit histories can receive credit.

Close Popup

We use cookies to give you the best online experience. By agreeing you accept the use of cookies in accordance with our cookie policy.

Close Popup
Share This