Can you become debt-free in 1 year through loan settlement?

Summary

Loan settlement is an option that can be a relief for those who are burdened with heavy debt and are not in a position to repay it. However, this is not an easy way. It requires negotiations with the bank, arranging a lump sum amount, and accurate documents. Apart from this, your credit score can also be negatively affected after the settlement.

For example, if you have a loan of ₹5 lakh and you have paid ₹3 lakh, but are not in a position to repay the remaining ₹2 lakh, then you can talk to the bank about settlement. If the bank agrees, then it can take ₹1 lakh and waive off the remaining ₹1 lakh. That is, you can get rid of the loan for a lesser amount.

But, it is important to keep in mind that settlement is not considered “full payment” by CIBIL or other credit bureaus. Because of this, it may be difficult to get a loan or a credit card in the future. Therefore, opt for this option only when all other options are exhausted.

If you can pay a lump sum, this route can make you debt-free in a year. Conversely, if you do not have such funds, EMI or restructuring would be better options.

Introduction

In today’s fast-paced life, taking loans has become a common thing. Be it a personal loan, home loan, credit card dues, or education loan – everyone is paying some kind of EMI. Initially, this loan seems helpful, but when its installments cannot be repaid on time, then this loan becomes a burden. In such a situation, a question often arises:

First of all, it is important to know what exactly a loan settlement is. When a person is unable to repay the loan amount to the bank or financial institution on time, then the bank gives him a “Settlement Offer”. In this, on depositing a certain amount, the bank waives off the remaining dues. Meaning, if you had taken a loan of 2 lakhs and have repaid 1.5 lakhs, then the bank can say that you should settle the matter by paying another 30,000 rupees. This is called loan settlement.

Now the question arises, can it get rid of debt? Technically, yes. But it is not that simple. Although loan settlement can provide immediate relief, it also has many disadvantages, such as a sharp drop in CIBIL score, difficulties in getting a loan in the future, and questions being raised about your ‘creditworthiness’ in the eyes of the bank. Therefore, it should be seen as a ‘last option’ and not the first choice.

Becoming debt-free in a year through loan settlement is possible, but it requires the right strategy, understanding, a nd guidance. In the following article, we will understand in detail what the process of loan settlement is, what its advantages and disadvantages are, and how a person can make themselves debt-free in a year by making the right plan.

What is a Loan Settlement?

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.

What are the reasons for doing a Loan Settlement?

Below are some common reasons:

• If a person loses his job, stops a source of income, or suffers huge losses in business, then it may be difficult to repay the loan on time.

• There may be a shortage of money to repay the loan if the expenses suddenly increase due to a major illness or medical emergency.

• Many times, a person has the burden of more than one loan, which becomes difficult to repay on time.

• There may be problems in repaying the loan due to any natural disaster, accident, or any major crisis in the family.

• If the interest rate of the loan is very high and there is a problem in repaying the installment, then a Loan Settlement is resorted to.

• Many times, a person is not able to manage his expenses and income properly after taking a loan, which causes problems in repaying.

What documents are required to do a Loan Settlement?

Let us know what documents are required for the Loan Settlement:

1. ID Proof

• Aadhar Card
• PAN Card
• Passport
• Driving License
• Voter ID

2. Address Proof

• Aadhar Card (if it has the correct address)
• Electricity or Water Bill
• Copy of Bank Passbook or Bank Statement
• Rent Agreement (if you live on rent)

3. Income Proof (if required)

• Salary Slip (if you are employed)
• Bank Statement (last 6 months)
• Copy of Income Tax Return (ITR)
• Business Documents (if you are a businessman)

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:

• Why do you want a settlement?
• What is your financial situation?
• How much can you pay as a one-time payment?

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.

What to do before doing a Loan Settlement?

Below are some steps that should be followed before a Loan Settlement:

• First of all, check your income, expenses, and all other debts properly. Know how much you can repay.

• Before a Loan Settlement, share your problem with the bank or lender. 

• Sometimes, they can offer you a better solution, such as reducing the EMI or increasing the loan term.

• Contact a financial advisor or expert. They can help you make the right decision and explain how a Loan Settlement will affect your credit score.

• If you decide to do a Loan Settlement, read the terms and conditions given by the bank carefully. Make sure that you are not being charged any hidden fees.

• Doing a Loan Settlement can reduce your credit score. This can make it difficult to get a loan in the future. Make a decision keeping this in mind.

• Loan Settlement should be the last option. Before that, consider other options like refinancing, reducing EMIs, or asking family and friends for help.

How to apply for a Loan Settlement?

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.

Step-by-step process to apply for Loan Settlement

• First of all, decide that you are not in a position to pay the entire Loan dues.

• Check your income and expenses and decide how much you can pay at most.

• Talk to the customer care of your bank or Loan company and tell them about your current financial situation.

• Ask for a settlement offer from the bank and start the conversation.

• The bank will propose a settlement amount, which will be lower than your outstanding amount.

• If you don’t accept this amount, negotiate with the bank and attempt to lower the amount based on your capacity to pay.

• After the bank and you reach an agreement on a specific amount, ensure that you receive a written settlement letter.

• It should explicitly state the settlement terms, payment dates, and other conditions.

• After completing the settlement, pay the amount in full within the given time.

• Get a No Due Certificate (NOC) or Final Settlement Letter from the bank after the payment.

• After the settlement, make sure the bank updates the “Settled” status in your CIBIL report.

• This can affect your credit score, so inculcate good financial management habits to improve it in the future.

What is the impact on the CIBIL score after a Loan Settlement?

A settlement can hurt your credit score. The impact can be seen in the following ways:

• After the settlement process, your credit report records that you have “settled” your debt. This entry remains in your credit history for 7 years and can be viewed negatively by lenders or other creditors, which can affect your chances of getting a loan in the future.

• Since a settlement means that you have not repaid the entire debt, when you try to get a new loan in the future, banks may reject your application or offer you loans at higher interest rates by looking at your credit score and report.

• After settlement, if you have a Loan or other credit line, your credit limit may be reduced as creditors think you may be a high-risk customer.

• If your credit score drops, it may be difficult for you to get a loan, Loan, or any other type of credit facility. This can also affect your financial stability, especially if you face a financial emergency in the future.

• When you settle with your bank, you are not paying off the entire debt, but a certain amount that is less than the principal amount. This is viewed negatively by the credit bureaus, as it shows that you have been unable to repay your debt. As a result, your credit score may drop.

What are the advantages (Pros) of doing a Loan Settlement?

Let us know what the benefits of doing a Loan Settlement are:

• If your Loan dues have become very high, and you are unable to repay them, then a settlement can give you great relief.

• When you do not pay your Loan continuously, the bank can send a legal notice to you and can also send a recovery agent.

• The interest on Loans is very high, which can be up to 30-45% per annum. If you are not paying on time, the interest and late payment fees keep increasing continuously.

• While a settlement will bring down your CIBIL score, provided you exercise financial responsibility after the settlement and settle your other loans and bills punctually, you will improve your score over time.

• In a Loan Settlement, you pay a specific sum at one time, which settles your debt entirely. It may be helpful to the people who desire to come out of debt by increasing a little money at a time.

• Mental tension grows through rising debt and bank calls. On settlement, you are free from this concern, and you may concentrate on a better financial status again.

What are the disadvantages (Cons) of doing a Loan Settlement?

Let us know in detail what the disadvantages of doing a Loan Settlement are.

• The biggest disadvantage of a Loan Settlement is that it spoils your CIBIL score. When you settle with the bank and pay a lesser amount instead of paying the entire dues, the bank reports it in “Settled” status. This status can remain in your credit report for up to 7 years, which may make it difficult to get a loan or a new Loan in the future.

• If you have done a Loan Settlement once, banks and other financial institutions may consider you a “high-risk customer”. This may cause problems in getting a home loan, personal loan, or business loan, or the bank may give you a loan at a higher interest rate.

• In some cases, when you go to take a loan from another bank in the future, the bank may ask you to repay the entire previous settlement amount after looking at your credit history. That is, if you had settled by paying Rs 50,000 on an outstanding amount of Rs 1 lakh, then the new bank can demand the remaining Rs 50,000 from you.

• If you have settled a Loan with a bank, then the same bank can refuse to issue you a Loan again in the future.

• Doing a Loan Settlement can spoil your relationship with the bank. The bank sees it as if you have not fulfilled your financial responsibilities completely, due to which you may face problems in banking services in the future.

Can you become debt-free in 1 year through loan settlement?

Yes, but with some conditions. Through loan settlement, you can get rid of the loan that you had taken from the bank, but for this, it is important to keep some things in mind:

• You should have a lump sum amount

Settlement is possible only when you can pay a fixed amount to the bank at once. If you have this fund, you can settle many loans together.

• Negotiate with banks properly.

It is not easy to get settlement approval from the bank. For this, you may have to provide medical certificate, proof of job loss or proof of other financial problems.

• It affects the credit score. 

Banks and credit bureaus record loan settlement as ‘loan default’, due to which your CIBIL score can fall by 100–150 points. This will affect your future loan eligibility.

• It is a one-time option only.

If you take a loan and settle every time, then no bank will give you a loan in the future. Consider it only as an emergency measure.

In what circumstances can loan settlement prove beneficial?

• When your source of income has stopped

• When you have no other option left

• When you are under mental stress

• When the interest on the loan has become very high

• When you can make a lump sum payment

What strategy should be adopted to become debt-free in 1 year?

• Make a list of all loans – note EMI, interest rate, outstanding amount

• Talk to the bank – request for settlement

• Keep proof ready – documents of illness, unemployment, loss

• Arrange for a lump sum amount – break FD, borrow from a friend, sell property

• Take NOC after settlement, ​​so that there is no dispute in the future

• Plan CIBIL correction – for the future.

What are the best strategies to become debt-free?

Below are some effective and easy strategies that you can adopt to gradually move towards a debt-free life:

Understand your entire financial situation.

First of all, know how much loan you have taken from whom. Make a list that should include:

• How much is the total loan
• How much interest is being charged on which loan
• How much EMI is being paid every month

Start making a budget.

Keep a record of income and expenses every month. Cut down unnecessary expenses and save money separately to repay EMI or loan. Make a strict budget so that unnecessary expenses can be avoided.

Repay high-interest loans first (Avalanche Method)

Start repaying the loans on which the highest interest is being charged first. This will save interest, and the debt will end quickly. This is called the “Debt Avalanche Method”.

Try the Snowball Method (Psychologically Effective)

If you need motivation, pay off smaller loans first. This will boost your confidence, and you will be more motivated to pay off the rest of the loans.

Try to increase EMI

If your income has increased a bit or you have received a bonus, try to increase the EMI. This will finish the loan quickly and also reduce the interest amount.

Conclusion

Lastly, when we consider the entire topic “Can loan settlement make you debt-free in 1 year?”, the reply is both yes and no. On the one hand, loan settlement can be a rescue for those who are facing a serious financial crisis and can’t pay the loan EMIs in time. On the other hand, it is a short-term measure, and the long-term effects of which can damage your credit profile.

Therefore, you should not make any decision without thinking. In case you have a lump sum amount and you are under high mental stress, then loan settlement can provide relief to you and make you debt-free in 1 year. However, before that, you need to discuss with the bank, get all the papers ready, and make sure you receive a “No Dues Certificate (NOC)” once the settlement has been made.

Along with this, you also have to realize that the credit bureaus do not treat the settlement as a “full payment”, but assign to it the label “Partially Settled” or “Settled”, which may reduce your CIBIL score. Because of this, if you wish to avail of a loan, credit card, or any sort of financial facility in the future, then you might have lots of issues with it.

Frequently Asked Questions (FAQ’s)