Loan Servicing

Ensuring that payments, interest, and all other relevant dues are collected adequately from borrowers

Loan servicing refers to the process where a company ensures that payments, interest, and all other relevant dues are collected adequately from the borrower. 

Hence, a loan servicer is responsible for ensuring that the borrower meets the due requirements of the loan based on the agreement.

Servicing debt is complicated and requires many tasks to ensure that debt is managed well. Of course, there are responsibilities mainly pertaining to collecting dues and working with the borrower to resolve issues with making payments. 

This means the servicer is responsible for the following tasks:

  • Sending monthly payment statements to borrowers

  • Collecting dues

  • Maintaining records of payments

  • Remitting funds to lender 

  • Following up on difficulties with borrowers having issues making payments and tackling other problems raised by the debtor

  • Transparent communication with the lender in case of issues outside of the servicer's responsibility

  • Alerting lender and debtor of any day-to-day issues with payments immediately

The lender pays the loan servicing firm to carry out this process; therefore, this work is usually outsourced for convenience. However, several lenders have separate departments that service loans.

Lenders wish that payments are made without delay and in full. Hence, loan servicing firms have gained a group of high business repeat clientele as they specialize in managing this activity, allowing lenders to focus their efforts on issuing capital to creditworthy individuals and entities.

Differences between Loan Servicers and Lenders 

It can often be difficult to differentiate between lenders and loan servicers as, in many cases, the roles may overlap; therefore, the table below highlights the key differences.

Loan ServicersLenders
Day-to-day operations of managing loansFocus on approving loan requests and managing funds effectively
A third-party firm hired by the lender or the lender itselfCan service loans, but with a growth in the lending space, most lenders have hired third-party firms specialized in the space.
Notifies borrower with monthly billing statements and ensures to receive dues on timeMonthly payments are sent to lender from servicer if applicable


Note that many banks still service their loans and even provide these facilities to traditional firms as a fee; therefore, lenders can also run such services.

Loan Servicing Companies examples

The following companies are some of many that operate in the servicing space, providing these services to different areas of the lending industry.

Types of Loan Servicing

Before discussing the types of loan servicers, it may be helpful to understand the commonly financed loans and some examples of this kind of loan firms in this space.

  • Student Loans: Students requiring capital for investing in their education take up student loans; the lending space has grown significantly through issuing these types of loans. 

  • Personal Loans: This broad category includes taking up debt for several reasons. Usually, such loans are paid in a relatively shorter time frame, such as one to five or more years. Some common examples include taking on debt for funding a vacation, purchasing goods/services, weddings, and medical treatments.

  • Business Loans: Firms requiring capital for attractive projects and activities take loans to finance these investments to hopefully make a return on them that makes the risk of the activity worthwhile. For example, this may be a corporation applying for a loan to finance the development of a new product line.

  • Mortgage Loans: Purchasing real estate requires a large sum of capital; therefore, many banks and lenders finance these activities. For instance, People in need of housing can apply for a mortgage for a term of 30 years that allows them to live in a home and spread the payments on the asset. Banks and credit unions, and typical mortgage lenders.

  • Automotive Loans: This type of loan finances the vehicle needs of individuals, such as cars, trucks, and other automotive transport. 

  • Special Considerations: There are extremely specific classes of loans, such as trying to finance specific activities. Typically, the interest on these loans tends to be on the higher end due to a small pool of lenders willing to analyze and finance such situations.

As you can imagine, the different areas of the lending space require servicing to maintain the financing activities. Hence, several other loan servicing firms operate in different areas of the debt market. 

Some types of loan servicer's include:

1. Banks

To this day, banks still service much of the loan market as they have the resources to carry out such services reliably. Therefore, many banks originate and service loans, meaning a borrower needs to primarily communicate and work with the bank and no loan servicing agency. 

However, since the financial crisis in 2008, banks comparatively do not serve as many loans as they are focusing on ensuring that debt is issued to high-credit quality individuals and entities.

Even so, banks still service a considerable portion of loans today.

 2. Non-Bank Lenders

Loans that are approved by institutions or individuals that are not banks fall in the category of non-bank lenders. These companies and individuals may service their loans in-house instead of hiring a company.

3. Third-Party Vendors

The companies mentioned before are examples of third-party vendors as these firms specialize in providing these services. Often a major chunk of their business comes from providing such facilities. 

An increasing number of third-party vendor firms are in this industry, allowing for a competitive environment that allows banks to outsource loan servicing at a competitive cost.


The loan servicer is compensated by a small percentage of the payments towards your debt made by you. This servicing fee or a servicing strip is a relatively small percentage; therefore, third-party vendors specializing in this industry rely on servicing a large volume of payments to produce large profits.

Usually, the loan servicer is compensated between 0.25% and 0.5% of every periodic payment. For instance, if your monthly mortgage payment on your house is $2000 and the servicing strip is 0.25%, your servicer takes a cut of $5 (0.0025*2000) of every payment before passing the rest to the lender.

The loan servicing industry is being shifted to non-bank parties due to larger regulations and restrictions on lenders. Hence, the industry is being captured by these parties.

Loan Servicing Advantages and Disadvantages for Lenders

Lenders may have larger in-house costs to service loans, therefore, hiring a third party can often save capital and resources.Servicing fee or servicing strip of about 0.25% to 0.5% of each payment
Lower hassle with handling borrower queries and problemsLoan servicer fraud cases and other major issues may come into play
Allows lenders to focus time and effort on managing capital, and distribution.Hiring a third-party firm carries risk as the lender needs to work and communicate with the company to ensure satisfactory operations and service to borrowers.

What Loan Servicing means for borrowers

For a borrower, the relationship with a loan servicer is quite different than that of a lender. If you take out a loan, you will frequently communicate with the representatives servicing your loan, whether that's a company or the bank itself.

The role of the loan servicer is to answer the borrower's questions and tackle any difficulties in making payments. Therefore, as a borrower, you can contact your servicer and make inquiries regarding your debt to understand the terms better and what's expected of you.

Further, work with your lender and be aware of the debt agreement between you and your lender to avoid issues. This is especially true for individuals borrowing from private lenders, where one party may try to take advantage of the other.

Therefore, understand the permissions and boundaries between you and your lender to avoid complications. When getting your debt serviced, you can raise questions and read through agreements to understand the terms set between both parties.

Sometimes, borrowers can have issues with the individual and/or company appointed to service their loan. A complaint can be filed to the Consumer Finance Protection Bureau in such cases. 

If you have a student loan, you can specially make a query to the Federal Student Aid Office of the Department of Education. A suspected case of fraud can be reported to the Federal Trade Commission (FTC).

Loan Servicing Quick FAQs


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Research and authored by Imran Husain l Linkedin

Reviewed and Edited by Aditya Salunke I LinkedIn

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