How to maintain financial discipline, there is no need for settlement.

Summary

In today’s era, in view of the increasing trend of financial problems and debt, it has become very important to adopt Financial Discipline. It is not just limited to saving money or controlling expenses, but it is a thinking and lifestyle that helps us to keep our future financially secure.

Financial Discipline means spending according to income, making a monthly budget, saving and investing regularly, and using credit or loans wisely. When we adopt these things seriously, we never have to face a difficult situation like loan settlement.

Many people are unable to pay EMI on time, increase credit card dues or take more loan than needed. To avoid these habits, it is important that we track our expenses, avoid unnecessary expenses and create an emergency fund. Also, it is also important to adopt financial literacy so that we can make the right decisions.

Introduction

In today’s time, everyone wants to live a better life – a good house, a new car, expensive mobiles, foreign travel, and much more. To fulfill these dreams, we often take out loans, use credit cards, and cross the limits in spending. Everything seems good in the beginning, but gradually, when the EMI (Instalment) starts becoming heavy, credit card bills start increasing, and income does not increase as much, then the real problem begins. In such a situation, many people reach a situation of loan settlement, which not only spoils their CIBIL score but also makes it difficult to get a loan or credit card in the future.

But now the question arises – can this situation be avoided? Is it possible that we never come to a situation like the loan settlement? The answer is yes, it is possible, and the biggest solution to this is Financial Discipline.

Financial Discipline means maintaining a balance between your income and expenses, understanding the difference between need and desire, and developing the habit of saving and investing for the future. This is not a difficult task; just a little awareness and following a few rules are required. When you take your financial habits in the right direction, you not only improve your present, but also save yourself from financial crisis in the future.

In today’s article, we will learn in detail what is Financial Discipline, how it can be adopted, which habits make it strong, and which mistakes should be avoided so that you never have to face a situation like loan or credit card settlement. Along with this, we will also tell some easy and practical solutions which every person can apply in their daily lifestyle.

What is Financial Discipline?

Financial Discipline means managing your income and expenses in a balanced and wise manner. It is a habit in which a person earns, spends, saves, and invests money wisely. It is very important to understand the difference between necessary and non-essential expenses.

For example – If your monthly income is ₹30,000, then you first spend on essential things like rent, ration, electricity-water bill etc. After that, you put some money in the savings account and then whatever is left, you fulfill your entertainment or hobbies with that. This wisdom is called Financial Discipline.

How to maintain financial discipline?

Below, we are telling you some easy and effective ways by which you can improve your financial life and avoid a situation like a settlement:

1. Making and following a budget

Make a budget at the beginning of every month – that is, how much you are earning and where you will spend it. Such as rent, ration, bills, school fees, transport, mobile recharge, etc. Then, spend according to this budget and avoid non-essential things.

2. Understand the difference between need and desire

We often spend our desires considering them as needs, such as expensive clothes, branded phones, eating out frequently, etc. Spend on needs, and give some time to desires. This will save money, and you will not have to take unnecessary loans.

3. Give priority to savings

Every month, put at least 20% of your income in savings. Set it aside first, then spend the rest of the money. You can invest in places like RD, FD, or mutual fund SIP.

4. Use credit cards and loans wisely

Use credit cards only when you can pay the bills on time. Do not take loans unnecessarily, and the EMI of the loan you are taking should not exceed 30-40% of your salary.

5. Create an emergency fund

Any unexpected expense can arise at any time – like illness, job loss, car breakdown, etc. Save at least 6 months’ worth of expenses separately for such so that you do not have to take a 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 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 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.

How to apply for 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 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 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 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 Loan 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 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.

How to maintain financial discipline? So that there is no need for settlement?

In today’s time, financial problems have become an important part of everyone’s life. People take out loans, use credit cards, and sometimes spend more than their income. When you are unable to pay on time, a situation like loan settlement arises, which harms your credit profile in the future.

But if you adopt financial discipline, then such a situation will not arise. The suggestions given below will help you in that direction.

1. Spend according to income

First of all, understand that you should not spend more than you income. Set a spending limit according to your monthly income. If you spend less than you income, you will never need a loan.

2. Make a budget and follow it

Make a budget at the beginning of every month, which includes rent, ration, bills, children’s fees, travel expenses, etc. Put this budget on the wall or track it in a mobile app. This will give you a complete picture of your expenses.

3. Pay Yourself First

At the beginning of every month, put at least 20% of your income in savings or investments. Instead of spending this money, set it aside. Later, spend the remaining money.

4. Differentiate between need and greed

Many times, what we buy is not a need, it is just a greed – like a new mobile, branded clothes, or frequent online orders. If you control these, a lot of money can be saved.

5. Limit the use of credit cards and loans

Use credit cards only when you can pay the entire bill on time. Do not take loans without need, and if you do, then its EMI should not be more than 30% of your salary.

Conclusion

To live a life that is financially safe and stress-free, it is essential to become financially disciplined. When we incur expenses without planning, make too much use of credit cards or loans, and do not even bother about saving or investments, then slowly, we become caught up in debt. Because of this, most individuals find themselves in a position where they are forced to turn to means such as loan settlement, which can lead to further issues for them in the future – such as declining CIBIL score, loss of faith in banks, and inability to secure new loans.

But the positive aspect is that if we incorporate some small habits in our daily life, such as – preparing a monthly budget, spending less than income, saving regularly, planning investments, knowing the difference between need and desire, and paying bills or EMIs on time – then we can manage our financial life to a large extent.

Apart from this, creating an emergency fund, increasing financial literacy, and thinking before making big expenses or loans also make you financially strong. By following all these things, financial balance will be maintained in your life, and you will never reach a point where you need to take a step like settlement.

Frequently Asked Questions (FAQ’s)