Interest As A Collection Tool

Talking to a Fintech client coming on board today, we talked about interest and how it helps the collection process.

If a client has in their service agreement, statement or invoice something along the lines of 'outstanding accounts will be charged 2% interest per month or 24% per annum, compounding monthly' this can create soft leverage on collecting accounts.

Should clients be calculating $0.08 in interest and adding it to monthly statements?  No.  Should they chase a consumer for an interest charge if their payment is four days late?  Also no.

But when an account comes from the client to the collection agency, interest can assist in creating a sense of urgency.  If you show a debtor there is a small cost for delaying or ignoring a debt, no matter how Small that increase is, it can make the account a priority for them.

And the best part?  Not charging the interest.

If you have an account owing for $2000, at 2% per month that's going to increase $40 the first month, then $40.80 the next month and so on.  If the debtor can pay $2000, that's great... But what if they have financial strain and can only pay $100 per month?  The agency should freeze the interest as long as the payments are made in a timely fashion, it rewards the debtor for resolving their account.

And if the debtor is unreasonable?  And they refuse to pay the $2000 and hang up on the collection agent... And then call back two years later to pay the account, because they can't get a car loan?  Well, then they owe $3,216.87.  That's the cost of ignoring the debt, which lawfully can charge interest.  In these cases, collecting the interest on the balance is justified, and it assists offsetting the cost for the client for the collection agencies' services.

Now judgments and post-judgment interest?  That's a little different... But some latitude might be negotiated.

At our agency, we have a FREEZE button that lets our collection team withhold interest from being added.  And 90% of our clients let us use that as leverage to encourage repayment, and we get higher liquidation rates in the long run.

Got questions about compound interest enforcement?  Drop me a note.

Thanks kindly,

Blair DeMarco-Wettlaufer

Kingston Data & Credit

Gatineau, QC

226-946-1730

blair@receivableaccounts.com