EMI and Loan Settlement, which is better?

Summary

By and large, loan settlement and EMI (Equated Monthly Installment) are both financial means to deal with debt, though in different situations. EMI is a systematic way of repayment of a loan in pre-established monthly installments over a period, along with interest as well as principal. It is a fix installment payment schedule made available to the borrowers, thereby easier to arrange and budget for finances. EMI is appropriate for those who can safely repay the loan amount in installments without any economic burden. Periodic EMI payment can also be useful to improve the credit rating of a borrower, provided timely manner.

Settlement of the loans, on the other hand, is apt for individuals who are economically under pressure and cannot pay the EMI from time to time. It involves negotiating with the lender to repay less money than is owed, typically a single lump sum. While loan settlement can provide rapid relief in the sense that it eliminates the outstanding amount of debt, it ruins the borrower’s credit report and has associated legal repercussions. It is consider a last option for those who are not able to repay the debt through regular means of payment.

Choosing between EMI and the settlement of a loan depends on the financial position of the borrower. If you can repay the loan in an installment manner, then EMI is a suitable option as it provides a sequential method of repayment of the debt without damaging your credit score. But if you cannot afford to repay the loan every month and are facing financial difficulties, loan settlement may be a faster method of settling the debt. In either case, it is necessary to examine your financial situation thoroughly and seek the advice of experts when necessary to make a well-informed decision.

Introduction

When handling finances, two terms that one generally comes across are EMI (Equated Monthly Installment) and loan settlement. Both processes are utilize by people to settle loans, but they work very differently. EMI is an installment payment scheme where lenders repay their loans in the form of small monthly payments, both the interest and the principal, over a specific period. 

On the other hand, loan settlement is a situation where both borrower and lender agree to settle the outstanding amount of the due loan for less than what is owed, generally after the borrower faces financial difficulties. The choice between EMI and loan settlement depends on a variety of considerations, like the borrower’s financial health, the amount of debt, and the borrower’s long-term goals. 

EMI is a plan method of repayment of loans through installments, so the borrower can easily maintain control over money without getting crush by an enormous amount at the initial stage. Paying off a loan, however, is a quicker method to get rid of debt in case one is under a severe financial crisis. Yet it could be couple with negotiations and will affect the credit score of the borrower.

In this article, we are going to explain both loan settlement and EMI in depth, contrasting their benefits and drawbacks, so you will have a better idea which one might be more suitable for your financial condition. If you are looking at taking a loan, having trouble paying one back, or just wish to know what are your options, this tutorial will give you informative information to make a more informed decision.

What is EMI?

EMI, or Equated Monthly Installment, is a predetermined amount of money that the borrower pays each month to settle a loan. It includes two components: the principal (the initial amount of money borrowed) and the interest (the additional cost incurred by the lender for lending the money). The EMI is the same in each month so that it becomes convenient for the borrower to manage his or her finances.

For instance, if you borrow money to purchase a house or a car, you will repay the money borrowed in the form of regular installments over some duration, like 1 year, 5 years, etc. You will make monthly payments of a fix amount until the repayment of loan is fully repay. By making this payment, you need not make large amounts together, and the payments can be arrange to suit you. The EMI also depends on the size of the loan, the rate of interest, and the loan duration (the duration within which you will repay the loan).

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 documents are require to do a Loan Settlement?

Let us know what documents are require for a 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, they give 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.

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.

EMI and loan settlement, which is better?

Choosing between EMI (Equated Monthly Installment) and loan settlement is primarily based on your financial situation, goals, and issues you are experiencing with your loan.

EMI: A Systematic Approach to Loan Repayment

EMI is primarily a suitable option if you can afford to pay monthly. It offers a systematic, periodic approach to repayment of the loan amount over a fixed period, such as 12 months, 24 months, etc. The amount and frequency that you pay monthly will be fixed, and this helps you to plan your finances accordingly. Besides, regular and timely payment of EMI enhances and/or maintains your credit score, which is crucial for future requirements.

Advantages of EMI:

Simple budgeting with predictable monthly payments.

It enhances your credit score if paid on time.

Helps you keep your financial responsibilities intact without too much fluctuation.

Disadvantages of EMI:

Requires regular income for payment.

Is slow in repaying huge loans when the repayment period is long.

Loan Settlement: A Quick Exit from Debt

Loan settlement is an option of choice if you are struggling to pay and are likely to default on your loan. Here, you settle the debt prematurely by paying a part of the loan, normally less, to your financier. It may bring relief in the short run if you are burdened by finances, but there are serious drawbacks.

Advantages of Loan Settlement:

Helps you pay off the loan earlier by paying a lesser amount.

It can turn out to be your savior if you are no longer in a position to make EMI payments.

Disadvantages of Loan Settlement:

Harms your credit history.

May involve negotiations, which are not always fruitful.

Could have legal consequences depending on the lender’s policies.

Which is Better

If you are in a stable financial situation and have the means to pay periodically, EMI will generally be the best option because it helps you repay the loan amount completely over a period without harming your credit. But if you are financially troubled severely and cannot afford your EMI any longer, settling the loan may provide a quicker but more hazardous exit route.

Finally, the correct option is your payment processing ability and the severity of your financial status. It is always best to consult a finance counselor or your lender to determine the best solution for your case.

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:

• 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.

• 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.

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

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

• 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.

• 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.

Conclusion

Last but not least, both EMI and loan settlement are crucial monetary decisions that serve various purposes based on the borrower’s situation. EMI is a great choice for borrowers who prefer to have a stable and systematic way of repaying their loans. It gives borrowers the freedom to pay small, manageable amounts of money every month, and it becomes easy for them to plan their finances. 

This choice is ideal for those who have a consistent income and the ability to make regular payments in the long term. EMI helps to build a credit history as long as payments are made on time, and it can be a safe way of paying back loans without becoming financially strained.

Settlement of the loan, however, can be a choice for those with serious financial issues. If you cannot pay back the entire loan, loan settlement is where you agree with the lender to pay less to clear the debt. While this may be a savior in tough times, be aware that loan settlement can reduce your credit score and might not be for everyone. Furthermore, repayment of the loan can involve protracted negotiations, and the borrower must be prepared for possible legal and financial consequences.

Finally, whether EMI or loan settlement is better depends on your finances. If you can afford to keep paying installments and pay back the debt period-wise, then EMI would be a viable option. Otherwise, if repayment of the money is proving to be a hindrance to you and repaying the amount completely is not in your question now, loan settlement could provide relief in debt eradication.

Frequently Asked Questions (FAQ’s)