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How Does Inflation Impact the Debt Collections Industry?

May 23, 2022

The mere mention of the word ‘inflation’ causes dread in the hearts of ordinary people and business leaders alike. Inflation leads to a higher cost of living which means people are forced to borrow more money to meet their monthly expenses. And people get trapped in this vicious cycle of borrowing money to make up for the overhead costs.  

So what does this mean for the debt collectors?  

To start with, it makes their jobs harder when people intend to get more loans instead of paying them off. So it’s an uphill battle for the debt collectors to convince the people to do just the opposite.  

Read on to discover more insights into how inflation affects the debt collections industry and what creditors can do about it.  

Inflation Pushes Debtors to Take More Debt  

Inflation rose to 7.9%, the highest ever in the last 40 years. This was followed by a 0.25% point hike in the interest rate, with six more such hikes expected by the end of 2022. This is the result of the Federal Reserve’s efforts to cope with the rise in inflation, which has pushed the prices of everything from groceries to fuel.  

With the continual rise of inflation and the expected interest hikes, it’s difficult for the debtors to repay the debt when they’re struggling even to stay afloat.   

In fact, 48% of the people have taken on more debt during the pandemic to manage the rise in prices due to inflation. This means debtors would be motivated to take out more loans or credit cards instead of paying back existing ones.  

Inflation Reduces Purchasing Power  

When there’s high inflation, your money buys less than before. This means that the purchasing power has decreased and debtors may have trouble paying off their debts. With the steep increase in the price of day-to-day consumer products and specialized manufacturing materials, customers are finding it hard to manage their finances on both personal and professional fronts. This means that even if they’re working hard and earning more money than ever before, it may not be enough to make ends meet anymore because prices have gone up. It could spell disaster for customers already under debt and struggling to purchase more raw materials to sustain their business. Such customers would prioritize getting more money to recover their business instead of paying back the debt.  

Inflation Eats Away at the Value of Your Debt  

As the rate of inflation increases, the value of the debt owed to the debt collectors tends to reduce. Since the value of the money has reduced in a year, so will the ‘buying power’ of the money. While this is theoretically true, inflation also increases interest rates. When an economy is experiencing increased prices and wages, lenders are more likely to raise their rates to compensate for increased risks associated with lending money. So, in the end, debtors are faced with repaying a high amount that compensates for the inflation. This would make it even harder to collect the debt.   

So What Can Creditors Do?  

  • Stay in Constant Touch with the Debtors  

The best way to get back your owed money from debtors is to stay in constant touch with them. This will help you collect your dues on time and save your relationship with them.   

The debtor will also feel more confident about paying off the debts if they know that they can talk to someone from the creditor’s office whenever they need help.  

At Capital Recovery, we use various communication channels to keep in contact with the debtors. We use direct voicemails, texts, automated voice responses, and our agents who will talk directly to the debtors and help them settle the debts as quickly as possible.  

  • Offer Discounts for Debtors Who Pay on Time  

Offering discounts to debtors who pay on time can increase your overall revenue significantly. This could be as simple as giving them a 5% off if they pay within the next seven days or even incentives like gift cards. This is one of the best ways to motivate clients towards timely payment of their dues and improve their loyalty to your business.  

  • Have Open Conversations with Debtors About Their Ability to Pay Off  

There are times when the debtors may be under huge financial problems, so talking with them openly can help find avenues to help them pay off the loan. If they’re having trouble paying off debt in full, you can also consider negotiating a payment plan to help recover the debt in parts.  

  • Get the Help of Debt Collectors  

If you’re having trouble recovering the debts, consider seeking help from professional debt collectors who will negotiate with debtors on your behalf. You can save time focusing on your core tasks while the debt collectors will do everything to recover the money you’re owed.  

Here at Capital Recovery, we’ve worked with various organizations in healthcare, insurance, and commercial businesses, helping them to recover their debt. We work on a no-collection, no-fee stance — which means we only charge a commission for successful debt collections. Reach out to us now to figure out the best way to collect your debts.