Do you use third parties to collect debt?

Representative Example

Total amount of credit £80, duration of the agreement 29 days, rate of interest 292% per annum (fixed), total amount payable (in one repayment) £98.56. Representative 1281.8% APR.

Yes, as a last resort when we haven't been able to agree a repayment plan, we may use fully regulated and authorised third parties to collect any outstanding balances. If an account is passed over to a third party collection agency, then it will be noted in your credit report.

A DCA stands for a debt collection agency and are used by credit providers to help them collect unpaid bills and accounts. These unpaid accounts can be business or consumer debts. The role of the debt collection agency is typically to act upon instruction from the credit provider but as we shall see that is not always the case. DCA are regulated by the Financial Conduct Authority as are Consumer credit providers. As such they are subject to rules and regulations as well as guidance on best practice.

How do DCAs work?

DCAs have 2 main ways of operating:

The first method is that the original creditor sells or assigns the unpaid account to the DCA. This can occur at any stage once the account becomes due and remains unpaid. Even if you are paying as part of a rearranged agreement the amount you are paying may not be enough for the lender or it may be outside their normal in-house collections policies and processes.

The creditor must have the contractual ability to do this which will be in your original loan agreement so make sure to check this thoroughly. Often the lender will sell the debt on at a reduced price. They sell the debt in this way to extract some value out of it and to crystallise their losses upfront. They can use the cash to reinvest in their working capital plus the money save from having to continue to try and collect the funds from you. The important thing here is that the DCA becomes the legal owner and economic beneficiary of the account.

The second main way a DCA operates is act on behalf of the lender almost as an extension to their in-house collections team. This can take the form of using the lenders name or the name of the DCA depending on how overdue the loan is, where the customer is in the collections cycle etc. The DCA is paid a percentage of the amount they collect. This is known as contingency collections. In this scenario the original creditor still owns the debt.

Debt collection agencies

What do DCAs do?

There is some confusion between a DCA and other types of collection firms such as High Court enforcement aka bailiffs. The former i.e. the DCA has no special legal rights or powers over and above that of the original lender. The latter does indeed have a court order to enforce and so some legal rights and powers to enter properties and seize goods etc.

Example debts that a DCA collects:

  • Car loans
  • Mortgage arrears
  • Credit cards
  • Unsecured loans
  • Store cards
  • Payday loans

Like a lender then, DCAs use the phone, letters and emails to contact you and ask you to arrange payment of your outstanding debt. The DCA should have all your personal information plus all the information regarding your debt, such as when you took it out, the credit agreement you signed and other pertinent information such as the loan schedule showing any and all payments to date. Some lenders also provide all the account notes as well so that the DCA knows what has occurred previously which may be relevant to their collection efforts.

Remember though that if your loan agreement allows and all statutory docs are in order a DCA can, if it so wishes, pursue an unpaid debt in the courts. Under a contingency arrangement this is usually done by prior agreement with the lender. Under a debt sale scenario, the DCA has slightly more autonomy to decide the optimum course of action. However, in all cases court action is very much a last resort and can only be used where it is applicable and appropriate to do so.

A debt collector has contacted me what do I do?

The first thing you should do is open the letter or take the call as ignoring the situation will not make it go away and could have serious consequences not least to your credit report. As mentioned DCAs are regulated and have strict rules about how they can act and what they can say and do, so don't be apprehensive. Engaging with the debt collector is the best way to work out a mutuality agreeable plan. The emphasis here is on mutual, as any plan that is unrealistic or unsustainable is not in anyone's interests.

Do DCAs freeze the balance from more interests and fees?

This all depends on what the agreement was with the original lender and what is detailed in the credit agreement. It is usual that lenders do not sell the debt nor get a DCA involved on a contingency basis until the balance has stopped moving. This is to prevent complexities between loan management systems creating balance errors. However, this isn't always the case as some DCAs collect balances using the original creditor's loan management system to prevent this. Remember for HCSTC such as payday loans, you can never pay back more than double what you borrowed.

What happens if the DCA has made a mistake?

Sometimes a borrower can forget about a loan especially if a significant chunk of time has passed. We could cover the whole topic of Statue Barred debt but that is beyond the scope of this answer. The main point to note is that if you think there has been a mistake make sure to write to the DCA to outline this and ask them to contact the original creditor. It is very rare but not unusual that during the handover from the lender to the DCA any payments made at the precise moment of handover may not have been updated to the balance yet. This error should be quickly fixed. You can then ask for an up-to-date balance. This will enable you to appraise your financial situation and come up with an affordable and sustainable way of paying off your debts. The important thing to note is to stay calm, engage with the collection agency and seek free debt advice if you are having a difficulty in repaying.

Two agencies you can speak to for free advice are:

For more information on how we lend responsibly see our Responsible Lending Principles.