What documents are required for a Personal Loan Settlement?

Summary

Personal Loan Settlement is a process in which the bank or the lending institution settles your outstanding loan for a certain amount by giving a discount. This can prove useful for those who are unable to repay the full amount of the loan due to a financial crisis. But some important documents are required to complete this process. 

To settle, you will have to provide documents like identity proof (Aadhaar card, PAN card), address proof (electricity bill, bank statement), income proof (salary slip, bank statement, ITR), and CIBIL report. Apart from this, if you are in a financial crisis, you may also have to submit proof of job loss, medical reports, or documents related to other financial difficulties.

When the bank accepts your settlement request, they give you a settlement offer letter, which contains the amount and terms of the settlement. After agreeing to this letter and making the payment, you need to get the final payment receipt and No Dues Certificate (NOC).

Introduction

If you have taken a personal loan from a bank or financial institution and, for some reason, are facing difficulty in repaying it, then a loan settlement can prove to be a good option for you. Personal Loan Settlement means that the bank or lender settles for a fixed amount by giving some discount on your outstanding loan so that the loan can be closed. But for this, some important documents are required, without which the settlement process cannot be completed. 

When you demand loan settlement from the bank, first of all, you have to give proof of your financial situation so that the bank can understand that you are unable to repay the entire loan. For this, income proof, bank statements, salary slips, and other documents are necessary. Also, if you want to settle the loan due to any financial crisis, illness, or any other compulsion, then it is also necessary to give proof of that.

Apart from this, the bank usually also checks your CIBIL score and the old repayment history of the loan. Hence, it is important to understand your credit score and bank statements thoroughly before applying for a loan settlement. Another important document is the loan agreement, which states your loan terms and the outstanding amount.

Personal Loan Settlement is a solution, but it should be seen as a last resort. If you decide to settle, it is important to have the necessary documents ready beforehand so that the process can be completed quickly and without any hassle.

What is Personal 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 paying the entire outstanding loan amount. This facility is for those who are unable to repay their loan on time due to some reason 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, which may make it difficult for you to get a loan in the future. Therefore, it should be adopted only as a last option.

How does a Personal Loan Settlement work?

Personal Loan Settlement companies negotiate with creditors to reduce the outstanding amount on unsecured loans such as credit cards, medical bills, or personal loans for you. Personal Loan Settlement is not just an option for secured loans, such as mortgages or auto loans.

These offers only tempt banks if they think you won’t pay back the loan at all, so a personal loan settlement company will advise you to stop making payments on your loan immediately and instead open an escrow account and put your monthly payments into it. Once you have enough money saved up for a lump sum payment for a personal loan settlement, the personal loan settlement company facilitates the transaction.

What documents are required for a Personal Loan Settlement?

If, for some reason, you are unable to pay your loan in full, then a loan settlement can be an option. In this, the bank or loan-giving institution (NBFC) settles your outstanding loan for a certain amount by giving some discount. But to complete this process, you have to submit some important documents.

Documents required for loan settlement:

Identity Proof

• Aadhaar Card
• PAN Card
• Passport
• Voter ID
• Driving License

Address Proof

• Aadhaar Card
• Electricity or Water Bill
• Bank Passbook or Statement
• Ration Card
• Passport

Income Proof

• Salary Slip (last 3-6 months)
• Bank Statement (last 6-12 months)
• Income Tax Return (ITR)
• Form-16

Loan Agreement

This is the document issued by the bank or NBFC at the time of giving the loan. It contains the details of the loan terms and your outstanding amount.

CIBIL Report (Credit Score Report)

During the loan settlement, the bank checks your CIBIL score, which gives them information about your credit history. This report shows your credit behavior and current loan status.

Settlement Request Letter

If you want to get the loan settled, then you have to give a written request letter to the bank, in which you will tell about your current financial situation and the need for settlement.

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

Let us understand both of these in detail:

Personal Loan Settlement

In this, the borrower negotiates with his bank so that some part of the total loan amount can be waived off. This means that the borrower has to pay less than his original borrowing. This process is adopted when the borrower is unable to repay the entire loan amount and tries to settle with the bank.

Credit Card Loan Settlement

Credit Card Loan Settlement is a process through which you can reduce your credit card dues by negotiating with the bank or credit card provider. When you are unable to pay the entire outstanding amount of your credit card and your financial situation becomes critical, the bank or credit card company agrees with you. In this, you are given a chance to end your liability by paying a certain percentage of the principal amount.

Are there any other options apart from a Personal Loan Settlement?

If you do not like the option of Personal Loan Settlement, then you can also consider some other options, such as:

• Loan Rescheduling: In this, the bank reschedules the loan of the borrower, which makes it easier for the borrower to pay his installments. Under this, the monthly installments of the borrower are reduced, but the loan period is increased.

• Loan Refinancing: In this, the borrower repays the old loan by taking a new loan. This new loan is usually at a lower interest rate, which reduces the monthly installments of the borrower.

• Consolidation Loan: In this, the borrower combines all his small loans into a big loan and pays it in a single installment. This makes it easier for him to manage the loan, and the interest rate can also be reduced.

How does a personal loan settlement affect your credit score?

The impact can be seen in the following ways:

• After a personal 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 personal 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 Personal Loan Settlement process, your credit report will be entered 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 Personal 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 Personal Loan settlements?

It has the following advantages and disadvantages:

Pros (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 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.

Cons (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 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 “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 document

• 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.

Conclusion

Personal Loan Settlement is a process in which the bank or loan-giving institution (NBFC) settles your outstanding loan at a certain loan amount by giving a discount. This can prove to be helpful for those who are unable to repay the full loan amount due to some reason. However, some important documents are required to complete this process, which include identity proof, address proof, income proof, bank statement, CIBIL report, loan agreement, and documents related to financial crisis.

When you apply to the bank for loan settlement, they should have correct information about your current financial situation. Therefore, you have to submit your income proof, job loss letter, medical report (if applicable), and other documents related to the financial crisis. Apart from this, the bank also checks your credit score and loan repayment history.

After settling the loan, you must obtain the final payment receipt and a No Dues Certificate (NOC). This can prevent any kind of financial trouble in the future.

Frequently Asked Questions (FAQ’s)