How to do a defaulted personal loan Settlement?

Summary

Defaulting on a personal loan can be traumatic for any individual, but panic is not required. With the proper approach, the loan can be paid off without any legal action. First, call the bank and provide the correct details of your financial status.

In One-Time Settlement (OTS), the bank takes a lump sum payment by settling some part of the outstanding loan. That can negatively affect your CIBIL score since it is marked as “Settled”. So, if at all possible, choose to restructure through EMI so that your credit score does not get harmed.

If the bank has sent you a legal notice, immediately talk to it and get a written agreement. Behave properly with the recovery agent and report any misbehavior. To avoid legal action, always try to find a solution and set flexible terms with the bank for payment.

Introduction

Nowadays, many people take personal loans to meet their needs. This loan is easily available without any guarantee, but many times, due to financial constraints or emergency expenses, people are not able to pay EMI on time. When the loan installments are not paid regularly, it comes under the category of default. After this, the bank or finance company can send a legal notice, send a recovery agent, or even file a court case. This situation can be stressful for anyone.

But there is no need to panic! If you have defaulted on a personal loan, it can also be settled in the right way without facing any legal action. Banks and financial institutions are also ready to compromise with customers because they also want the loan to be settled and their money returned.

In this article, we will tell you what ways to settle a defaulted personal loan are. We will also understand what settlement means, how to negotiate with the bank, how to take a settlement offer, and how to avoid legal action. Also, we will give you some important tips so that you do not get into this situation again and can also improve your credit score.

What is Personal Loan Settlement?

When a person takes a personal loan from a financial institution (such as a bank or NBFC) and is unable to repay it on time due to some reason, it falls under the category of default. In such a situation, the bank or the loan-giving institution can also take legal action to recover its money or can give the option of a loan settlement.

Personal loan settlement means that the loan amount is reduced and decided by mutual consent between the bank and the customer. In this, the bank closes the loan account by taking a lump sum amount. Usually, this amount is less than the outstanding loan, which provides financial relief to the customer.

How does a Personal Loan Settlement work?

When a person is unable to pay the EMI of his loan on time and the outstanding amount accumulates over a long period, the bank or financial institution offers the option of Personal Loan Settlement. In this, the bank allows the customer to pay a discounted amount instead of the entire outstanding amount, thereby settling the loan matter.

The process of settlement comprises discussions between the bank and the customer, wherein the bank assures that the customer can’t pay the entire loan amount. Thereafter, the bank issues a single-payment offer, which is typically lower than the outstanding loan balance. On the payment of this settled amount by the customer, the bank marks the loan as “Settled”. Yet, this is not good for the CIBIL score since it is not treated as a “Complete Payment”.

Hence, Personal Loan Settlement should be opted for as a matter of last resort, and if at all possible, loan repayment schemes, loan restructuring, or alternative financial solutions must be opted for so that the credit rating is not impacted.

What is the difference between a Personal Loan Settlement and a Credit Card Personal Loan Settlement?

Although both Personal Loan settlement and Credit Card loan settlement aim to provide relief to the borrower, there are some important differences between them.

Points of Difference	Personal Loan Settlement	Credit Card Loan Settlement
Type	Settlement of any type of loan (personal, home, car, education, etc.)	Settlement of Credit Card dues only
Settlement Process	The bank fixes a lump sum amount, on payment of which the loan gets settled.	The credit card company settles the amount at a fixed amount.
Impact on CIBIL score	CIBIL score may drop by 50-100 points, and it may become difficult to get a loan in the future	There is a huge impact on the CIBIL score, and it may be difficult to get a new credit card.
Possibility of getting a loan in the future	You may face problems in getting a home loan, car loan, or any other loan	Credit card companies may refuse to issue the card.
Possibility of being blacklisted	Less	especially from credit card companies

How do I apply for a Personal Loan Settlement online?

If you want to apply it online, then follow the easy steps given below:

Visit the bank’s website or app.

• Open the official website or mobile app of your loan provider or bank.

• Sign up if you already have an account, then log in. Otherwise, create a new account.

Check the customer support section.

• Go to the ‘Customer Support’ or ‘Contact Us’ section on the website or app.
• Here, you can find the option related to “Personal Loan Settlement”, such as:
• Filing a loan-related complaint.
• Request form for Personal Loan Settlement.

Fill out the request form for the settlement.

• Select the “Personal Loan Settlement Request” option.
• Fill in the required details, such as:
• Your name
• Loan account number
• Email ID and mobile number
• Reason (why you want to settle, such as financial problems or reduction in income).

Upload the required documents.

• Upload documents that show your current financial situation, such as:
• Income certificate or salary slip
• Bank statement
• Any other proof that explains your problem.
• Upload all the documents by scanning them in the correct format (PDF or JPEG).

Submit and wait for the bank’s response.

• Once you have submitted the form, the bank will verify your request.

• The bank will most likely contact you within 7-10 working days. They will notify you of the settlement through email, call, or message.

Read the bank’s offer.

• The bank will make an offer to waive some portion of your pending amount. Carefully read it.

• If you accept the offer, go ahead. Otherwise, bargain further.

Make payment

• Pay the decided settlement amount from the bank in online payment mode.

• The bank will provide a payment confirmation and close your loan account.

How much impact does a Personal Loan Settlement have on your CIBIL score?

Personal Loan Settlement has a direct and negative impact on your CIBIL score. When a person takes a loan from a bank or NBFC and is unable to repay the entire amount due to some reason, the bank gives him a chance to make a settlement, which is called a Personal Loan Settlement.

However, there is a huge difference between a Personal Loan Settlement and a Loan Closure. If you close your loan by repaying its full amount, it is recorded as “Closed” in your credit report, which improves your CIBIL score. But if you have got some amount of the loan waived off under an agreement with the bank, it is reported as “Settled”, which can harm your credit score.

What are the ways to improve your CIBIL score after a Personal Loan Settlement?

If you have settled the loan and now want to improve your CIBIL score, then you can take the steps given below:

• Pay all loan and credit card bills in full on time.

• If possible, try to change the “Settled” status to “Closed” by contacting the bank.

• Use credit cards limitedly and make full payments on time.

• Take a small loan and repay it regularly to build a new good credit history.

• Check the CIBIL report regularly and request that CIBIL rectify any mistakes.

How do you choose the Personal Loan Settlement service?

Here are some important points to consider that will help you choose the right Personal Loan Settlement service:

Check the service provider’s credentials.

Before hiring a settlement service, make sure that the service provider you are hiring is registered and certified with financial institutions and banks. Only a reliable service provider can provide you with the right guidance and support. Checking online reviews and customer feedback is a good way to do so.

Check the service charges and other expenses.

Many service providers also charge a service fee, but make sure that the charges are not high and there are no hidden costs. Negotiate with the service provider beforehand about which services are free and for which you will have to pay extra.

Understand the settlement process.

Carefully understand the settlement process offered by the service provider. Do they understand your entire situation and provide you with a better solution to negotiate with the bank? A good provider will give you complete information about the paperwork and the process so that you understand the entire process properly.

Make sure they are legally compete.

You should also ensure that the service provider is legally recognized and aware of all the rights that are associated with the settlement of your loan. This will prevent you from facing any legal hassles in the future.

Consider other solutions as well.l

Before choosing the settlement process, make sure that the service provider also gives you information about alternative solutions like loan restructuring or new payment plans. These options can sometimes be better than a settlement and do not hurt your CIBIL score.

Customer support and communication

A good service provider will always stay in touch with the customer and resolve your problems properly. Make sure they answer your questions quickly and are ready to work with you in any difficult situation.

Join our service

If you are also trapped in the debt trap and are facing a financial crisis and want to adopt the path of Personal Loan Settlement, then you can apply for our Personal Loan Settlement service. We will help you in settling your loan. Along with this, we provide you relief from the burden of the loan within 6 – 8 months. If you want to get more information about our service, then you can contact us.

How long does it take for a Personal Loan Settlement to be processed?

The time taken for the settlement process also depends on various factors, such as the policies of your bank or lender, the outstanding amount, and the communication between the two of you. Usually, this process can take from 1 to 3 months.

The first action in the process of settlement is to approach the bank, where you tell your problem and payment status to the bank. Then, the bank proposes a settlement offer according to your situation. In case you agree with that proposal, you need to pay the amount to the bank within the agreed time. The bank indicates the loan as settled, and this would take some time.

The longer this entire process continues, the more it can impact your CIBIL score, so it is preferable to resolve the issue sooner.

What are the advantages and disadvantages of Personal Loan Settlements?

It has the following advantages and disadvantages:

Advantages

• Personal Loan Settlement improves the financial condition of the borrower.

• By doing a Personal Loan Settlement, you can manage your income and costs better and avoid a financial crisis in the future.

• The heavy burden of debt often causes mental stress. With Personal Loan Settlement, the borrower gets relief from this stress, and he can find mental peace in his life.

• Through Personal Loan Settlement, the borrower gets a chance to get part of his debt waived off.

• This helps to improve his financial condition and gives him relief from a heavy financial burden.

• Although a Personal Loan Settlement can affect the borrower’s credit score, by following the agreement on time and properly, he can gradually improve his credit score.

Disadvantages

• In the future, the borrower may have difficulty in getting loans from these institutions.

• Through Personal Loan Settlement, the entire loan of the borrower is not waived off. He still has to pay some amount, which can affect his financial condition.

• During a Personal Loan Settlement, the agreement between the bank and the borrower has many conditions. The borrower is required to follow these conditions, which can limit his freedom.

• After a Personal Loan Settlement, the borrower’s credit score may be affected.

• Personal Loan Settlements may create difficulties in taking new loans or obtaining credit cards in the future.

• Due to a Personal Loan Settlement, the borrower’s relationship with the bank and other financial institutions may deteriorate.

How to settle a defaulted personal loan without facing legal action?

When a person is unable to pay the EMI of a personal loan on time for some reason and the payment remains pending for several months, he is called a defaulter. In this case, the NBFC or bank can issue a legal notice, employ a recovery agent, and even file a civil case to recover the loan. However, no need to panic whatsoever! If you follow the correct approach, the loan can be repaid without any court proceedings.

What is the process for a defaulted personal loan settlement?

Let us inform you of the entire process of settlement of defaulted personal loans:

Direct contact with the bank

If you cannot return the loan, initially approach the bank and provide details of your financial condition. Based on knowing your condition, the bank will be able to offer some special concessions, viz:

• EMI Restructuring – The bank may lower the EMI or the tenure period of the loan.

• Moratorium Period – You might be allowed to suspend the EMI for some months.

• Settlement Offer – You can be offered by the bank to settle the loan for a lower amount compared to the outstanding amount.

Offer One-Time Settlement (OTS)

One-Time Settlement (OTS) refers to the fact that you can negotiate with the bank and settle the amount in lump sum form rather than the entire outstanding amount.

• In this, the bank and the customer decide by mutual consent how much money will be paid to close the loan.

• Banks can usually give a discount of 50% to 70%, but it depends on your financial situation and the bank’s policy.

When you repay this amount, the bank closes the loan account and does not take any further legal action.

• Note: OTS settlement can affect your CIBIL score as it is reported in “Settled” status, which can make it difficult to get a loan in the future.

Compromise to avoid legal notice

If the bank has sent you a legal notice, you can still try to compromise with the bank. Banks often prefer settlement to avoid legal action.

• Assure the bank in writing that you are ready to pay but cannot pay the full amount due to your financial situation.

• Take the settlement offer and get it in writing so that there is no dispute in the future.

• Talk to the recovery agent properly and complain to the bank about any wrongdoing.

Opt for loan restructuring

If you are unable to repay the entire loan but want some relief in EMI, you can request loan restructuring.

• The bank can reduce your EMI and extend the loan tenure.

• This option has less impact on the credit score and helps avoid legal action.

Improve your credit score

Your CIBIL score may drop after loan settlement, which may make it difficult to get a loan in the future. Therefore, you should take these steps to improve your score:

• Pay credit card dues on time.

• Pay small loan EMIs on time.

• Check your credit report regularly and get any mistakes corrected.

Conclusion

Missing personal loan payments can be a major issue, but if one follows the correct approach, then it can be sorted out without any legal problems. The only thing one should do is pay attention to solving the issue rather than losing control. If you are not in a position to pay the EMI, then inform the bank and let them know your current financial position.

The bank typically presents a few options to offer relief to its clients, including a one-time settlement (OTS), loan restructuring, a moratorium period (temporary relief in EMI), or modification of payment terms. If you communicate with the bank properly and explain your situation, they may agree to some solution to save you from legal action.

While the advantage of a one-time settlement is that you can get rid of the loan by paying a lesser amount, its negative effect is that it can spoil your credit score. Therefore, consider all the options before settlement and, as far as possible, prefer EMI restructuring or a loan repayment plan.

Frequently Asked Questions (FAQ’s)