Loan settlement is a deal with your lender or bank to pay off part of the loan amount, usually because you cannot pay back the entire loan due to financial constraints. It is also referred to as loan settlement and can relieve you of your debt burden, but it has some risks associated with it, mostly to your credit score.
Both private and bank loans are payable, though in different ways. Banks mostly have a process where they discuss your financial health and make a one-time settlement proposal. Private loans, which come from individuals or finance companies, have lenient terms and are sometimes negotiable directly. But whichever way, always be truthful with your stand and keep all letters in writing.
Loan settlement must be resorted to only when all other means, be it restructuring of the loan or assistance from family, are not feasible. It saves you from court proceedings or harassment by recovery personnel, but it also reduces your CIBIL score and remains in your credit report in the years to come. It can make new loans in the future hard to obtain.
Today, taking a loan has become the order of the day. People take loans for different reasons, like buying a house, establishing a business, studying further, or in a medical emergency. Loans are either taken from banks or from individual lenders. All is fine in the beginning when we can pay the monthly EMIs on time. But sometimes, due to unexpected factors like loss of job, health problems, or financial losses, it becomes difficult to repay the loan.
Loan settlement is simply negotiating with the lender to pay some percentage of the sum you owe and settle the loan in full. The lender or bank usually extends it when they see that the borrower is not in a position to repay the whole loan owing to unavoidable monetary problems. Such a settlement is generally less than what is outstanding against the loan, and upon settlement, the loan account is closed.
There are certain processes followed by banks and financial institutions to settle loans. They can request evidence of your financial situation, and depending on that, they might provide an option for a one-time settlement. Private loans, borrowed in most cases from individual lenders or NBFCs, may have different and less formal procedures.
In this article, we will take you through step by step how to settle your bank loans and private loans smartly and legally. We will explain what a settlement is, when you should consider it, what you need in terms of documents, how to negotiate with the lender, and what effect it can have on your credit report. We will also discuss loan settlement versus loan closure, negotiating with lenders, and what to do to avoid getting into a debt trap all over again.
A bank loan is borrowed funds from a bank when you need help to purchase something that requires a lot of money, for example, a house, a vehicle, starting a business, or school charges. The bank gives you the money, and you pay back later, probably monthly, in EMIs (Equated Monthly Installments). Besides the borrowed amount, you also pay some amount of money known as interest.
This is how the bank earns profit. When the bank gives you a loan, initially they check your income, profession, credit report, and all to make sure that you can repay. Banks have different loans like personal loan, housing loan, car loan, study loan, etc. Taking a loan from the bank can be beneficial, but keep in mind that you should only borrow what you will be able to repay in due time to avoid any trouble later on.
A private loan is funds borrowed from someone or a private organization instead of a bank. Private lenders can include family, friends, moneylenders, or private financial organizations. Private loans are easier to acquire than bank loans because they may not require too many checks or documents.
But they charge higher interest rates to lend, and the conditions are not always as explicit or safe as bank loans. Some private lenders may even coerce you into early repayment. That is why you have to be cautious and read everything carefully before availing of a private loan. Always take only what you need and see that you repay on time.
Loan Settlement is a process in which you negotiate with your creditor to forgive a part of the outstanding amount on your Loan by making a lump sum payment. It is an agreement that you make with your card issuer as a last resort when you see that your Loan debt is increasing.
This can happen due to many reasons, ranging from unnecessary spending to careless spending habits. When your debt increases, the interest on it also increases, which can make it difficult for you to repay the outstanding amount. If you do not see any way out of this, then you can recommend a Loan Settlement.
Below are some steps that should be followed before a Loan Settlement:
Below are some common reasons:
Let us know what documents are required for a Loan Settlement.
1. ID Proof
2. Address Proof
3. Income Proof (if required)
4. Loan Statement
You will have to provide the Loan statement to give the correct information about your outstanding balance. The bank can also generate this statement itself, but sometimes they ask you for a copy of it.
5. Settlement Request Letter
If you are approaching the bank for settlement on your own, you will have to give a written Settlement Request Letter in which you can explain:
6. Settlement Offer Letter given by the bank
When the bank agrees to the settlement, it gives you a Settlement Offer Letter. Read it carefully and confirm the amount and terms mentioned in it.
If you are unable to pay your Loan dues and are troubled by heavy interest rates, a Loan Settlement can be a possible solution. Under this process, the bank or Loan company can waive off part of your total outstanding amount and give you the option to make a lump sum payment (One-time Settlement). However, this can affect your CIBIL score, so adopt it only as a last option.
A settlement can hurt your credit score. The impact can be seen in the following ways:
Let us know what the benefits of doing a Loan Settlement are:
Let us know in detail what the disadvantages of doing a Loan Settlement are.
Securing a private loan or a bank loan is a significant financial choice. Most individuals encounter loan issues because of loss of job, illness, business loss, or unforeseen expenses. When you cannot repay your loan, the debt continues to increase, and it becomes more difficult to cope with. Under such circumstances, loan settlement can be an option to ease your burden. It involves speaking to your lender or private bank and asking them to take a reduced amount instead of the entire loan, and then closing the loan account.
While this may look like an easy way out, you should realize that loan settlement should be the last option for you. In case you can repay the entire loan or reschedule the loan, that’s always better. Loan settlement will negatively affect your credit score, and this will get you into trouble in the future when you try to borrow a new loan, credit card, or even get a job in some cases.
Always attempt to communicate freely with your lender or bank if you have difficulty repaying. Don’t avoid or refuse their calls. Disclose your situation. Most banks and some private lenders will assist you if they understand that you are serious and genuinely in financial distress. Maintain all records of your communication, and ensure that you obtain a proper No Dues Certificate or Settlement Letter upon closing the loan. This will safeguard you from future legal or financial issues.
Que: What is loan settlement?
Ans: Loan settlement is when the lender accepts a smaller amount of money than that which you owe and shuts down the account of the loan. It usually happens when the borrower is unable to repay the entire loan due to financial problems.
Que: Is loan settlement a good option?
Ans: Loan settlement will give you temporary relief, but it will bring your credit score down. It has to be done when there’s no option.
Que: How is loan settlement different from loan closure?
Ans: Loan closure means paying the whole loan amount as per the agreement, while loan settlement means paying half of it, and the remaining amount is waived off by the lender.
Que: Can I settle bank and private loans?
Ans: Yes, you can settle bank loans and private loans, but the process could be different. Banks have formal processes, while private lenders can have loose or even informal procedures.
Que: Will the settlement of a loan affect my CIBIL score?
Ans: Yes, settlement of a loan lowers your CIBIL score and is reflected on your credit report for a few years. This makes it difficult to get future loans or credit cards.
Founded in 2015, Ahk Tips is a New Delhi-based financial advisor specializing in debt relief and loan management solutions.
