Is Loan Settlement the right option? Ask the Experts!

Summary

Loan settlement is an option that comes up when a person is unable to repay their loan installments on time. In such a situation, the bank makes an offer to the borrower – he can “settle” the loan by paying a certain amount instead of the entire outstanding amount. At first glance, this option seems to be a relief as it gives the person relief from the remaining loan.

However, this relief is temporary. As soon as the loan settlement happens, it is recorded in your credit report as “Settled” or “Partially Paid”. This directly affects your CIBIL score and future loan eligibility. In other words, banks believe that you did not repay the loan in full last time, so they can avoid giving you a loan in the future. This is not a legal waiver, and in some cases, the bank can try to recover further.

Introduction

Taking a loan has become a common thing in today’s time. Whether it is to build a house, buy a car, or meet any other important expense, people take loans from banks or financial institutions. But sometimes the situation becomes such that people are not able to pay the loan installments on time. In such a situation, the bank or lender puts forward an option: Loan Settlement. But now the question arises – is loan settlement the right option? Let’s understand this in simple words.

First of all, it is important to know what is loan settlement is. When a person is unable to pay the full EMI to the bank and repeatedly defaults, then the bank takes some amount from him and proposes to ‘settle’ the loan. That is, suppose you had taken a loan of ₹ 5 lakh and you have paid up to ₹ 3 lakh, but you are not able to repay the remaining ₹ 2 lakh. In such a situation, the bank can say that if you pay ₹ 1.5 lakh right now, then we will waive the remaining amount and consider the loan settled.

On the other hand, Loan Settlement affects your CIBIL score. Settlement means that you did not repay the entire loan. When you apply for a loan or credit card next time, the bank may think that you are a risky customer. This may also lead to rejection of your application.

Let us know further in this article what experts think about Loan Settlement, what are its advantages and disadvantages, and under what circumstances it can prove to be the right decision.

What is Loan Settlement?

It 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 the entire outstanding loan amount. This facility is for those who are unable to repay their loans on time and are continuously defaulting.

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

How does a 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”.

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

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

Points of Difference	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 rate.
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, a car loan, or any other loan.	Credit card companies may refuse to issue the card.

What documents are required for a Loan Settlement?

The following documents are required:

• Aadhar Card, PAN Card, Passport, or Driving License, etc.

• Salary slips, income tax returns, bank statements, etc.

• Loan Settlement letter, loan details, payment receipts, etc.

• Investment documents, property documents, insurance policies, etc.

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

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 Loan Settlement.

However, there is a huge difference between a 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 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 effects of a Loan Settlement on your CIBIL score?

• When a bank or NBFC reports to CIBIL that your loan is “settled”, your score drops immediately. The amount of drop depends on how good your score was earlier.

• Banks and financial institutions put customers who have settled their loans in the “high-risk” category. This means that in the future, if you try to take any type of loan (personal, home, car, or education), your application may be rejected.

• If you have settled a loan, it may be difficult to get a credit card from any bank in the future. Banks look at your credit history, and if they see a “settled” status, they may refuse to give you a credit card.

• Even if a bank decides to give you a loan, you may get the loan at a very high interest rate. This is because banks consider you a risky customer and charge a higher interest rate to protect their money.

• Loan settlement information remains in your CIBIL report for at least 7 years. This means that even if you improve your financial behavior later, your settlement record will continue to be visible to banks and may affect your creditworthiness.

What are the ways to improve your CIBIL score after a 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 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 to get NOC after loan settlement?

Let us know in simple language how you can get NOC after loan settlement.

1. First of all – Get confirmation of settlement

First of all, whenever you settle the loan, take a written settlement letter from the bank or financial institution on it. This letter is proof that you have paid the agreed amount and the bank has accepted it.

2. After this, Apply for NOC

After receiving the settlement letter, the next step is to ask for NOC from the bank. For this, you can write a formal letter or email to the bank in which you request that it issue a NOC.

3. Also – Attach all documents

When you send the application, do not forget to attach the following documents:

• Copy of the settlement letter
• Payment receipt or transaction details
• Your valid ID proof
• Loan account number
• Contact information

4. Then, follow up with the bank

Sometimes the bank may delay sending the NOC. In such a case, you should follow up by contacting the bank within 7-10 days. You can check the status through a phone call, email, or by visiting the branch.

5. Once you get the NOC, check it carefully

As soon as you get the NOC, check it carefully. Make sure that the following information is correct in it:

• Your name and loan account number
• Confirmation of payment
• Clear mention of “No Dues” or “No Objection”
• Bank seal and authorized signature
• If there is any mistake, contact the bank immediately and get it corrected.

What are the advantages and disadvantages of Loan Settlements?

It has the following advantages and disadvantages:

Advantages (Pros)

• 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.

• 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.

Disadvantages (Cons)

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

• 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.

• 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.

Is Loan Settlement the right option?

Loan Settlement is an option that comes up when a borrower is unable to repay the loan EMI. In such a situation, the bank or financial institution gives the customer an opportunity to settle the loan by paying a fixed amount, that is, the remaining amount is waived off. This option may sound easy, but there are many important things behind it, on which a decision should be taken after thinking carefully.

When can Loan Settlement prove to be the right option?

1. In a serious financial crisis:

If you have lost your job, have a serious illness or a situation has come where your income has completely stopped, then Loan Settlement can prove to be an emergency solution.

2. When there is no other option left:

If you have tried other measures like loan restructuring, relief in EMI or extension of payment deadline and still it is not possible to repay the loan, then this option can be adopted.

But why is it not always the right option?

1. Bad impact on CIBIL score:

After doing a loan settlement, “Settled” status is written in the credit report, which indicates that you have not repaid the entire loan. This can create problems in getting a loan or a credit card in the future.

2. Loan rejection in the future:

Banks may hesitate to give you a loan next time because they will not trust that you will be able to make the full payment.

3. There can also be legal risk:

In some cases, banks can take legal action even after settlement, especially when the agreement is not done properly.

What do experts say?

Financial advisors say that loan settlement should be seen as a last resort. If possible, talk to your bank first, get a new payment plan, or take some time off. Settle only when you have no other option and the situation is really serious.

Conclusion

And, lastly, loan settlement to settle a loan is an opportunity that brings with it some breathing space in grim times. Yet, this one comes at an enormous price, which will impact your future creditworthiness.

To start with, realize that loan settlement doesn’t equal waiving away your entire loan. It only means that the bank has agreed to close the loan by taking a fixed amount from you, but in return, it adds tags like “Settled” or “Write-Off” to your credit report, which harms your CIBIL report. Later, when you apply for another loan or credit card, it can go against you.

Apart from this, many times people hastily agree to a settlement without complete information. But they do not know that this can affect their future financial planning. For example, if you want to take a home or car loan in the future, the banks may consider you a “high-risk customer” and reject your application.

Frequently Asked Questions (FAQ’s)