Does the bank settle loans and credit cards together?

Summary

Nowadays, many people use personal loans and credit cards. But many times, it happens that due to some areas, we are not able to pay on time, and gradually, the debt increases. When the financial condition of people deteriorates and it becomes difficult for them to pay, then people talk to the bank about (Loan and Credit Card Settlement) “settlement”. The settlement means – agreement between the bank and the customer in which the matter is settled for some fixed amount instead of taking the full amount.

Now, the question also arises as to whether the bank settles both the loan and the credit card together. The answer is yes. In some cases, the bank does this, but it is not possible in every situation.

If both the accounts (Loan and Credit Card) are of the same bank, and your financial condition is very bad, then the bank can allow simultaneous settlement on your request. But it also depends entirely on the bank’s policy, your payment capacity, and the severity of the case.

Keep in mind that the settlement affects your credit report and CIBIL score. The tag of “settled” can become a hindrance in getting a loan or credit card in the future. , So this should be the last resort.

Introduction

In today’s time, many people take personal loans from the bank or use credit cards. Both these facilities help a lot in fulfilling our financial needs, but sometimes there comes a time when we are unable to pay the loan EMI or credit card bill on time. In such a situation, the debt starts increasing on us, and we start getting recovery calls from the bank again and again. When the situation worsens, we need to “settle” the loan or credit card through an agreement.

Now the question arises that if we have a bank loan outstanding and a credit card outstanding, can the bank settle both of them together? Can both be resolved in a single settlement? Will this give us some relief or will it affect our credit report and CIBIL score? Many such questions come to the minds of people who are struggling with financial crises.

Actually, bank settlement is a process in which the bank takes not the entire amount from the borrower but a percentage of the loan amount and closes his account. This is also called “one time settlement”. But it is also important to know that both loan and credit card are different products and their settlement also depends on different conditions.

In today’s article, we will learn in detail how the bank settles loans and credit cards, what documents are required, in which situation simultaneous settlement is possible, and what its advantages and disadvantages are.

What is a Settlement?

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 Settlement.

What is a Credit Card Settlement?

Credit Card Settlement is a process in which you negotiate with your creditor to forgive a part of the outstanding amount on your credit card 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 credit card debt is increasing.

This can happen due to many reasons ranging from unnecessary expenditure 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 Credit Card Settlement.

What documents are required to settle a loan and credit card?

Let us know what documents are required for a 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, they give you a Settlement Offer Letter. Read it carefully and confirm the amount and terms mentioned in it.

What should be done before settling on a loan and a credit card?

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

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

• Before a 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 Settlement will affect your credit score.

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

• Making a 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.

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

What are the reasons for settling loans and credit cards?

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 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.

How to apply for a settlement loan and credit card?

If you are unable to pay your Loan dues and are troubled by heavy interest rates, a 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.

Process to apply for settling loan and credit card

• 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 the 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 settling a loan and a credit card?

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.

Does the bank settle the credit card and loan simultaneously?

Yes, in some cases, the bank might agree to settle the loan and credit card simultaneously, but it also purely depends on the bank’s policy, your budget, and the outstanding amount.

Let us make this a bit easier:

1. What is a settlement?

Settlement is a deal between the bank and the customer, in which the customer settles his account by paying a lump sum amount, not the amount due. Banks refer to it as ‘One Time Settlement’ (OTS).

2. Can both be settled together?

• If you have a credit card and a personal loan from one bank and you defaulted on both of them, then you can request the bank to make an offer of settlement by amalgamating both.

• The bank can offer you a consolidated offer after taking your overall liability into account.

• Not all banks offer this facility, and sometimes a different settlement process is followed for both accounts.

What are the advantages (pros) of settling loans and credit cards?

Let us know what the benefits of doing a 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 settlement will bring down your CIBIL score, provided you exercise financial responsibility after settlement and settle your other loans and bills punctually, you will improve your score over time.

• In a Settlement, you pay a specific sum at one time, which settles your debt entirely. It may be helpful to the persons 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 better financial status again.

What are the disadvantages (cons) of settling loans and credit cards?

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

• The biggest disadvantage of a 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 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 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.

Conclusion

In today’s time, many people use multiple financial products like personal loan and credit card (Loan and Credit Card Settlement) simultaneously. When these are not paid on time, the debt gradually increases and the situation of the people worsens so much that they have to opt for settlement. In such a situation, it becomes important to know whether the bank can settle both these loans together or not?

As we discussed above, the bank may allow the settlement of both the loan and credit card together under certain circumstances. But this is not a common process. It completely depends on your financial condition, bank policy, and the severity of your case. The bank should be confident that the customer is no longer in a position to repay the entire amount and that settlement is the only option through which the matter can be resolved properly.

But you should also remember that settlement is not a highly rewarding choice, as it has a deep effect on your credit score. If you settle a credit card or loan, a “Settled” label is placed on your CIBIL report, which means that you have not paid the whole loan. This can make it hard to obtain a loan, re-apply for a credit card, or obtain any type of credit facility in the future.

Frequently Asked Questions (FAQ’s)