Personal Loan to Pay Collection Account: Good or Bad Idea?

pay collection with personal loan

Should you take out a personal loan to pay a collection account? Sometimes, it makes sense to do so.
For example, if:

  • The collection agency agrees to delete the account from your credit history if you pay it off
  • The amount is large enough that the agency is likely to sue you to recover it
  • The service charges and interest the agency adds is more than you’d pay a personal loan provider
  • The payment the agency requires is unaffordable

Also be aware that you may be able to settle your debt for less than the total due if you can offer the creditor a substantial portion of the total due in a lump sum. A personal loan may help you come up with this lump sum.

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“Pay for delete” to improve your credit score

Note that just paying off a collection account won’t automatically improve your credit score. You must negotiate with the creditor and get an agreement in writing to remove the entry from your credit history.

AmOne has a sample “pay for delete” letter that you can send your creditor before you pay it any money.

Collection “Pay for Delete” Sample Letter

Pay to avoid a lawsuit

If you have income or assets, you’re vulnerable to a lawsuit by a collection agency. That can increase your costs, because if the bill collector wins, it can add its costs to your balance. And the judgment will accrue interest until you pay it off. A public record like a judgment also does further damage t0 your credit score. And finally, the agency may be able to get a court order to attach your bank account or garnish your wages.

If you’re not “judgment-proof” because you lack income and assets, consider heading off a lawsuit by paying off the account. The agency may allow you to pay less than the amount owed, write off some fees and interest, or delete the entry from your credit report in exchange for a lump sum payment.

Get any agreements about your debt in writing before you send any money.

This one-minute video tells you what you need to know about paying off a collection.

Avoid high interest and other charges

Note the collection agency purchases the same rights to collect that your original creditor has. This means accounts in collection can continue to run up interest charges and other fees. If your collection is a credit card balance, and the credit card’s default rate or penalty rate is 36%, for instance, your balance can climb rapidly while in collections.

You may be able to negotiate a payment plan that stops the clock on interest as long as you make timely payments as agreed. But if not, the terms of a personal loan may be easier on you than those of a bill collector.

Get a payment you can live with

Many collection agencies are willing to work with you and set a payment you can afford. But some are very aggressive and may push for more than you can comfortably pay. A personal loan may offer better terms. And it has the advantage of getting the collection deleted (or at least marked “paid in full” on your credit report) right away.

Think twice about paying some collections

If your collection account is very old, think twice before you contact the collection agency. Depending on the statutes of limitation for debt in your state, your creditor may not be able to legally pursue you for the balance. Any contact with the collector can restart the clock on the statutory time.

In addition, older collections have less affect on your credit score. But activity on the account, like starting a repayment plan, can make the account new again and hurt your credit score.

See our page with statutes of limitation for every state to verify your state’s time frame.

Statutes of Limitations for Credit Card Debt Collection by State

Sometimes, it makes sense to take a personal loan to pay collection accounts. To see if it’s right for you, check out personal loan options and interest rates.

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