Sending demand letters is an effective way of getting borrowers to pay an overdue loan. As a financial institution, even with the best customers who promptly repay their loans, there can be times when they miss payments, default on a loan, violate loan terms, or ignore collection calls.
This begs the question of why send demand letters
Before answering that question, it’s good to note that sending a demand letter is among the first steps in the debt collection process.
If you are a Director of Credit or Credit Manager, Chief Financial Officer (CFO), CEO, credit analyst, or loan officer struggling to refine your financial institution’s debt collection strategies, this article is for you.
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Customers will always put on a smiling face when borrowing money. And you cannot deny them the loan they’ve applied for, especially if they have a good credit score, and have impressed you with their backgrounds.
Once you have given out the loan, your new role becomes clear. It no longer matters your role in the credit department. Your main and only goal is to recover that loan to maintain a healthy flow of money coming in.
A demand letter steps in to save your day, because (as it always will remain) it’s no use claiming you are a loan officer when you cannot close even one loan account.
The main test is in how you craft a demand letter that communicates on your behalf and gets that money repaid.
If you poorly do the letter, your message may be falling on deaf ears. Some of your emails may not even be read by the debtors, and payments will be minimal.
A poorly crafted demand letter endangers the customer relationship your financial institution has spent so much time building over the years.
Now, you might need to begin sending demand letters that get the borrowers to pay up.
If you write the letter well, you can significantly increase the chances of borrowers settling those debts promptly. Timely repayments of loans is crucial for your financial institution.
The Role of Demand Letters in Debt Collection
A demand letter is not just a random letter you send to delinquent borrowers. It acts as your official communication to the borrower regarding their outstanding debts.
The letter formalizes your request for payment, giving the borrower a last opportunity to repay before you can take any further legal action.
The Elements of a Good Demand Letter
A good demand letter contains key elements that make it more effective, as outlined below:
- Clear Identification: of the sender (creditor or representative) and the recipient (debtor) with contact information of both parties.
- Purpose Statement: Clearly state the purpose, i.e., demand for payment.
- Issue Explanation: Brief but detailed explanation of the issue (dates, amounts owed, etc.).
- Legal Basis: Legal basis for the demand, if any.
- The Specific Demand: Specific action/payment required from the borrower (amount owed, due date, acceptable payment methods, etc.).
- Consequences of Not Complying: i.e., additional fees, penalties, or legal action.
- Due date/deadline: Deadline for the borrower to take action.
- Documentation: If relevant, include documentation, i.e., a copy of the loan agreement, invoices, etc.
- Contact Information & Address: Phone number, email address, mailing address, etc.
Including the above elements in your demand letter effectively communicates your expectations to the borrower, encouraging them to promptly act and resolve the issue.
Maintaining a professional tone in the letter is key: The letter maintains a professional and respectful tone throughout, even if the recipient’s actions have been frustrating or disappointing.
What Does a Demand Letter Look Like?
A demand letter usually says something like the ones below:
General Initial Demand letter ( Stage 1)
[Your Name] [Your Address] [City, State, Zip Code] [Date]
[Borrower’s Name] [Borrower’s Address] [City, State, Zip Code]
Dear [Borrower’s Name],
[RE: LOAN REFERENCE (LOAN ACCOUNT NO)]
We wish to bring to your attention the overdue balance on your account with [Name of the Financial Institution]. According to our records, the amount of [Amount Owed] is outstanding and is now past due.
Please make payment of the outstanding balance by [Due Date] to avoid any penalties or additional fees.
Kindly call us on … or … for further details
Kind Regards,
[Your Name] [Your Title] [Financial Institution’s Name]
General Follow-Up Demand Letter ( Stage 2)
[Your Name] [Your Address] [City, State, Zip Code] [Date]
[Borrower’s Name] [Borrower’s Address] [City, State, Zip Code]
Dear [Borrower’s Name],
[RE: LOAN REFERENCE (LOAN ACCOUNT NO)]
This is in reference to our previous communication regarding the above matter.
Please note that your loan is still in arrears of {currency}. {Kshs}.
It is imperative that you take immediate action to settle the amount, failure to which may result in additional fees.
Kindly call us on … or … for further details.
Kind Regards,
[Your Name] [Your Title] [Financial Institution’s Name]
The above templates act as digital nudges that help the borrower stay on track with their payments.
The Power of Demand Letters: Prompting Delinquent Borrowers into Action
A demand letter has the capability to compel a delinquent borrower to pay. It is a finely tuned communication instrument that you use to balance tone and empathy when it comes to collections.
An Effective Demand Letter Doesn’t Only Demand Payment
It creates an understanding between yourself and the borrower. The letter uses persuasive language, plus a defined timing of follow-ups. These compel the borrower to willingly repay their debt.
Sending Demand Letters Prompt Delinquent Borrowers into Action
Rather than manually contacting each borrower every time their payments are due or overdue, customizable and automated demand letters work best.
A borrower already knows that they owe your institution money even before you send that letter.
The letter is a way for you to say,
We’re very serious about getting our money back.
And it usually makes the borrower realize that they need to tact to avoid any further consequences.
Every borrower dreads that time when they have to face a legal action. Also, no borrower wants their name forwarded to the Credit Reference Bureau, something that spoils their credit score.
So, when you send that demand letter, the borrower is more likely to act on it and try to resolve the issue before things go south.
Whether it’s making full or partial payments, or negotiating a new arrangement with you, the letter will have saved your day.
We all know how hot the air tastes when you fail to collect those debts, and we don’t want things to get to that level.
There is a way to save you the burden…
Making borrowers pay their debts is possible with an automated and customizable demand letter.
Automated demand letters streamline your debt collection workflow, giving you room to conduct credit analysis and better manage loan accounts.
Plus, it’s a timely and consistent communication to the borrowers.
The result?
More Promise to Pays. Increased collections. Greater satisfaction of the borrowers. Reduced risk of delinquencies on your side.
Increase Collections With an Automated Debt Collection System
Your current demand letters are poorly crafted and unautomated and you need the right approach. TERA Collect is a system that makes your debt recovery more efficient. It facilitates successful loan repayment, helping you maintain strong customer relationships.
When you try TERA Collect, you’ll also discover an increase in Promise to Pays (PTPs), and automation of repetitive tasks, i.e., sending reminders, follow-up emails, or messages to the borrowers, etc.
But:
It’s all about making the letters as personalized and easy for your customers to take action. When they will know you mean business and have a clear CTA with all the info they need to act on the letter, they will pay faster.
If that sounds like something that will save you from your current collection burden, let an automated debt collection tool like TERA Collect do all that for you.
Our tool is built to provide you with in-depth analysis and highlights of the categories of loan accounts that should get your attention.
So, there is more to find inside TERA Collect.
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