What’s Driving the Collection Industry?

The collection agency business has been growing significantly over the last few years, with more agencies than ever starting up. This is primarily due to more consumer debt; the rise in the cost of living has outpaced income growth over the past 12 years. While median household income has grown 26% since 2003, household expenses have outpaced it significantly.

Consumers also vastly underestimate or underreport how much debt they have. As of 2013, actual lender-reported credit card debt was 155% greater than borrower-reported balances. The cost of debt is weighing the consumers down as well: the average household is paying a total of $6,658 in interest per year. This is 9% of the average household income ($75,591) being spent on interest alone.

Here are three of the major contributors to debt collections in 2016.

  1. Healthcare costs

According to an annual report on health care costs by the Department of Health and Human Services’ Centers on Medicare and Medicaid Services, healthcare spending topped $3.8 Trillion in 2015. Along with that much spending comes payment collections due to consumers’ inability to make payment at the time of service.

41 percent of adults surveyed reported that they had medical debt or trouble paying medical bills. According to survey data collected by the American Credit and Collection Association International, 39 percent said they were contacted by debt collectors, 19 percent said they took out a loan that may be difficult to pay back, and 7 percent said they declared bankruptcy because of the bills.

  1. Student loan debt

The Economist reported in June 2014 that U.S. student loan debt exceeded $1.2 trillion, with over 7 million consumers in default. Part of this is caused by the increasing price of education. Public university students paid an average of almost $8,400 annually for in-state tuition, with out-of-state students paying more than $19,000 every year. The average student loan debt has increased 58% over the past seven years. It has risen from $17,233 in 2005 to $27,253 in the United States.

To break it out by amount owed, about 25% of borrowers owe more than $28,000, 10% of borrowers owe more than $54,000, 3% owe more than $100,000, and less than 1%, or 167,000 people, owe more than $200,000. Of the 37 million borrowers who have outstanding student loan balances, 14% have at least one past-due student loan account. For every student loan borrower who defaults, at least two more borrowers become delinquent without default. 

  1. Auto loan debt

According to figures from the Federal Reserve Bank of New York, Americans have accumulated more than $1 trillion in auto-loan debt. Around $119 billion in auto loans were originated in the second quarter of 2015 alone. The problem that these lenders are facing is that there is an increase in default rates.

According to Bloomberg, almost 5% of subprime car loans are delinquent, and the default rate is higher than that. At just over 12% in January, the default rate jumped one entire percentage point in just one month. Both delinquency and default rates are now the highest they’ve been since 2010.

Healthcare, student debt and auto loans have been increasing steadily over the last decade and the increase shows no sign of stopping.  As a collection agency, you can help the consumer pay their bills by offering multiple methods of doing so as well as outstanding service.  By understanding what the consumer is dealing with and helping them pay down their debt, collections will be a lot less stressful for both parties.