How to understand the hidden charges of loan settlement?

Summary

Loan settlement is an option that seems like a relief in times of financial crisis. However, on the other hand, it has many hidden charges that can prove to be costly for you if ignored. Therefore, it is very important to understand these hidden charges before loan settlement.

First of all, you should read the settlement letter carefully. Apart from the amount mentioned in it, many charges can be added under different heads like “Other Charges”, “Processing Fee”, “Penalty Interest”, “Legal Charges”, and “GST”. After this, ask the bank properly to know the actual reason behind these charges and whether these charges have been levied and whether they can be reduced or waived.

Then, compare your settlement amount and your initial outstanding amount to understand if you are getting relief or not. At times, because of concealed charges, you need to pay extra in the name of settlement.

Lastly, after depositing, get a written confirmation from the bank that you have completed the final payment and no dues are pending now. In this way, you will be free from any future legal or credit score-related issues.

Introduction

In today’s time, when people suddenly need money, they often take the path of taking a loan from a bank or financial institution. As easy as it is to take a loan, it can be equally difficult to repay it on time. Sometimes, circumstances become such that a person is not in a position to repay the entire loan, and then the option of “Loan Settlement” comes up. This is a solution in which the bank or financial institution settles the loan by taking a fixed amount from the person taking the loan. But do you know that many hidden charges are also associated with this process, which can later trouble you financially?

Now the question arises – what are these Hidden Charges, and why is it important to understand them? When we go through the process of Loan Settlement, banks can add many types of charges like processing fees, legal charges, penalty interest, etc. These charges are not told to you directly, but are recorded somewhere in small letters in the Loan Settlement papers. In such a situation, if you do not read the documents carefully, you can pay a large amount without knowing about it.

Apart from this, many times, agents or third-party recovery companies also ask for additional fees in the name of Loan Settlement, which may be against the rules. Therefore, it becomes very important that you understand all the charges and ask questions related to them before signing any papers in this process.

That is why in this article we will talk about how to identify all those hidden fees or charges related to Loan Settlement, how to avoid them and what things to keep in mind so that you can protect yourself from any kind of fraud or additional financial burden.

What is Loan Settlement?

This is a financial process in which the bank or financial institution allows the loan taker to settle the loan by paying a lesser amount instead of paying the entire outstanding loan amount. This facility is for those people who are unable to repay their loan on time for some reason and are continuously defaulting.

Under a settlement, the bank can agree on a lump sum amount, after which the loan is closed. However, it is important to note that loan settlement can affect your CIBIL score, which may make it difficult for you to get a loan in the future. Therefore, it should be adopted only as a last option.

What are the hidden charges in loan settlement?

The option of loan settlement is adopted when you are not in a position to repay the full amount of the loan and the bank closes the loan by taking a fixed amount. Although, at first glance it seems to be a relief solution, but there are many hidden charges in it which are often added without telling us. Now the question arises that what are these hidden charges? Let us understand them in sequence and simple language.

1. Processing Fee

First of all, when you accept the offer of loan settlement, the bank or NBFC may charge a processing fee. This fee is charged for the process in which your case is evaluated.

2. Legal Charges

Apart from this, if your case is very old or the bank has sent you a legal notice, then the expenses incurred on it can also be recovered from you. This expense can be added to your settlement amount or can be demanded separately.

3. Penalty Interest

Again, if you have not paid the EMIs or loan installments on time, penalty interest is also added for that period. These rates can be much higher than the normal interest rate, and this amount is included in the final settlement amount at the time of settlement.

4. Recovery Agent Charges

Apart from this, if your case is transferred to recovery agents, some agencies may ask for additional charges for their recovery services.

5. GST and other taxes

Finally, you may also have to pay GST or other taxes on any service charges levied in the settlement process. These small charges together can have a big impact on your pocket.

How does 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 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, 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.

How long does it take for a 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.

How do I apply for a 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 “Loan Settlement“, such as:
• Filing a loan-related complaint.
• Request form for loan settlement.

Fill out the request form for the settlement.

• Select the “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 does a Loan Settlement affect your credit score?

The impact can be seen in the following ways:

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

• If your credit score drops, it may be difficult for you to get a loan, credit card, 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 for a Loan Settlement with your bank, you are not paying off the entire loan, but paying a certain amount that is less than the principal amount. This is seen 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.

• After the Loan Settlement process, your credit report will be updated with the information that you have “settled” your loan. 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 Loan Settlement means that you have not repaid the entire loan, when you try to get a new loan in the future, banks may look at your credit score and report and reject your application, or give you a loan at higher interest rates.

What are the advantages and disadvantages of Loan Settlements?

It has the following advantages and disadvantages:

Advantages

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

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

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

• Loan Settlement improves the financial condition of the borrower.

• By doing a 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 Loan Settlement, the borrower gets relief from this stress, and he can find mental peace in his life.

Disadvantages

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

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

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

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

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

What is the legal process of loan settlement?

However, it is a legal process, and it is necessary to follow certain rules to do it.

1. Bank’s action in case of default

If you are unable to pay the loan EMI for 3 to 6 months continuously, the bank can declare it as NPA (Non-Performing Asset). After this, the bank can start the recovery process against you. Under the SARFAESI Act, 2002, the bank gets the right to seize your mortgaged property (collateral) and recover the outstanding amount by auctioning it.

2. Request a loan settlement from the bank

If you are financially weak and are unable to repay the entire outstanding amount, then you can request a One Time Settlement (OTS) or Negotiated Settlement. For this, you will have to give an application form (Loan Settlement Request Letter) to the bank, in which you will have to prove your financial position.

3. A Settlement Offer is given by the bank

After examining your situation, the bank gives a Settlement Offer, which decides the total amount you have to pay. This is usually less than the outstanding amount, but the bank’s consent is necessary for this.

4. Sign the Settlement Agreement

If you accept the offer given by the bank, you will have to sign a written agreement. It will be mentioned in it that after the settlement, the bank will not take any further legal action against you.

5. Pay the Settlement Amount

After signing the agreement, you have to pay the Settlement Amount within the stipulated time frame. The payment is usually made in a lump sum.

6. Get a No Dues Certificate (NOC)

Once you pay the settlement amount, the bank has to issue you a No Dues Certificate (NOC) to certify that your loan is now fully settled.

What are the things to keep in mind while settling a loan?

• Negotiate with the bank and find a fair solution.

• Get the loan settlement process in writing so that you do not face any problems in the future.

• Do not forget to update the CIBIL report after the settlement.

• Take the help of a financial advisor or lawyer if needed.

How to understand the hidden charges of loan settlement?

Let us know what the right way to understand these hidden charges is – that too in simple language and with transition words.

1. First of all, read the settlement letter carefully

Whenever a bank or financial institution offers you a settlement, they give a written document (Settlement Letter). At this time, you should first read that letter carefully. Look carefully at the amount, time limit, a nd additional charges given in it.

2. After this, pay attention to ‘Other Charges’ or ‘Miscellaneous Fees’

There is usually a column in the settlement letter where words like “Other Charges”, “Processing Fee”, “Legal Fee”, or “Late Payment Charges” are written. Remember, this is the place where hidden charges are hidden.

3. Then, inquire with customer care

If you don’t understand any term, ask the bank or customer care directly. Ask “Why was this charge imposed?”, “Can it be waived?” and “Will I have to pay GST for this as well?”

4. Then – Compare the Settlement Amount and Outstanding Amount

Now, compare the amount demanded in the settlement with your original loan amount and the payments made so far. Sometimes the settlement amount is increased more than necessary due to hidden charges.

5. Finally – Get written proof

Whenever you are ready for settlement, at that time, make sure to get it in writing from the bank that, after settlement, no additional charges will be levied and the account will be closed. This document can help you legally in the future.

Conclusion

Finally, when it comes to loan settlement, it is very important to understand that just reducing the outstanding loan amount is not the solution. Along with this, the hidden charges that are there can silently affect your financial situation. In other words, if you do not understand these charges properly, then you will settle the loan thinking that you have got relief from the bank, but in reality, you can move towards another financial problem.

Apart from this, many times people sign the documents on the instructions of the agent without reading them, due to which they are later forced to pay many types of charges like processing fees, legal charges, penalty interest, and GST. Therefore, it becomes necessary that you read and understand every paper, every amount, and every condition closely.

Another important thing is that, even after settlement, it is important that you get a clear statement from the bank that there will be no further charges or recovery and your account has been completely closed. In this way, you can protect yourself from any unwanted legal or financial troubles.

Frequently Asked Questions (FAQ’s)