What is a Loan Settlement Agreement, and how to draft it?

Summary

Loan Settlement Agreement is a legal document that records the loan agreement made by mutual consent between the borrower and the lender in written form. This agreement is made when the borrower is unable to repay the entire loan due to some reason and the lender allows him to repay the loan in a lesser amount. This is called Loan Settlement and to recognize it formally, a Loan Settlement Agreement is prepared.

This document mentions important points like the principal amount of the loan, the payment made so far, the amount of settlement, the date of payment, and freedom from liability in the future. It is also clarified that after paying the settlement amount, the bank will not make any further claims, and the borrower will be provided with a “No Dues Certificate”.

While preparing the Loan Settlement Agreement ,clear language and correct legal terms mustbee used in it. The document should be prepared on stamp paper and signed by both parties and two witnesses. This increases the validity of the document.

Introduction

In today’s time, when financial pressure is increasing, many times people are unable to repay their loans on time. Be it a personal loan, home loan, or credit card dues – when the loan is not repaid on time, the interest and penalty increase, and the amount becomes very high. In such a situation, an option comes up – Loan Settlement.

Loan Settlement Agreement is a written agreement which reflects the terms decided between the two parties. It states how much amount has been settled, by what date the payment has to be made, under what circumstances this agreement can be canceled, and whether there is any legal dispute related to it. The importance of this document also increases because it helps to avoid any confusion or legal hassle in the future.

Now the question arises that how to draft it? That is, how to prepare this agreement so that it is legally valid and can also protect the interests of both parties. While drafting, the language must be simple and clear. Also, it is very important to include all the important points in the document, such as date of agreement, outstanding amount, last date of payment, consent of both parties, signatures of witnesses, etc.

In today’s article, we will know in detail what is a Loan Settlement Agreement, why it is so important, what is the right way to draft it, and what things should be kept in mind. Also, we will give you a sample draft so that you can understand the process of preparing it yourself.

What is a Loan Settlement Agreement?

A Loan Settlement Agreement is a legal document that is prepared with mutual consent between the borrower and the lender. When a person or company is unable to repay the loan taken from a bank or financial institution on time, the bank agrees to it can “settle” the loan by paying a fixed amount, not the entire loan amount. A Loan Settlement Agreement is prepared to formalize this agreement.

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”. 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 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.

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 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.

When does the bank offer loan settlement?

As easy as it is to take a loan, repaying it can be equally difficult at times. Many times, people are unable to pay the loan EMI due to financial constraints, job loss, business losses, or other financial problems. When a customer is unable to pay EMI for several months in a row, the bank offers him a loan settlement. But this offer is not available to every customer, but is given only under certain circumstances.

Under what circumstances does the bank offer loan settlement?

• If a customer is not paying EMI for 6 months or more in a row, and the bank starts feeling that it will be difficult to recover the entire loan, then the bank can offer a loan settlement.

• If a person has become very weak financially, has lost his job, or is unable to work due to serious illness, then the bank can give the option of settlement.

• When a loan remains outstanding for more than 90 days, the bank declares it as NPA. In such cases, the bank can offer a settlement to reduce the losses.

• When there is a possibility of legal action by the bank against the customer, and the case may drag on, the bank can offer a settlement to settle the matter quickly.

• If the bank feels that it will be difficult to recover the entire loan from the customer and that prolonging the case will cost more, then it can offer a settlement.

How do you choose the loan settlement service?

Here are some important points to consider that will help you choose the right 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 which you will have to pay extra for.

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.

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 Loan Settlement, then you can apply for our Loan Settlement service. We will help you settle 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 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 to do if the bank does not settle the loan?

If you have taken a loan from a bank and, for some reason, you are unable to repay it, then a loan settlement can be an option. Loan settlement means that the bank gives you a chance to finish the loan by paying a small amount instead of paying the entire outstanding amount. But what if the bank does not accept your loan settlement request? In such a situation, you do not need to panic, but you need to take the right steps.

• If the bank has rejected your settlement request, then talk to the bank official again and explain your financial situation to them in detail. Sometimes, the bank can reconsider looking at your income and financial situation.

• If the bank is not ready for loan settlement, then you can demand loan restructuring. In this, the bank can reduce your EMI, reduce the interest rate, or increase the loan repayment period so that you can pay easily.

• If your financial condition has temporarily deteriorated, you can ask the bank for a grace period or moratorium. This will allow you to avoid paying EMIs for some time, which can give you time to improve your financial condition.

• If the bank is not helping you and you feel that your case is strong, you can file a complaint with the Banking Ombudsman or the Reserve Bank of India (RBI). This will ensure that the bank listens to your problem seriously.

• If none of the measures work, you can consult a financial advisor or legal expert. They can help you find a solution through legal means.

How to Draft a Loan Settlement Agreement?

By following the steps given below, you can draft a better and stronger Loan Settlement Agreement.

Step 1: Give the title of the document

• The title should be correct and formal, such as –

“Loan Settlement Agreement”

• Also, mention the date on the top of the document, such as –

This Agreement is made on the 1st day of January, 2025.

Step 2: Identification of Parties

• Write the complete information of both parties in it:
• Borrower’s name, address, and identification number
• Lender’s name (bank/financial institution), address

Step 3: Loan Details

Mention the original loan amount, loan number, loan date, and the amount paid so far.

Step 4: Settlement Terms

• Settlement amount
• Payment deadline
• Mode of payment (Online/cheque, etc.)

Step 5: Release Clause

Insert a clause that after this payment, the loan will be considered over, and no liability will remain.

Step 6: Dispute Resolution Clause

If any disputes arise in the future, how will they be resolved? Make it clear.

Step 7: Witnesses and Signatures

Get signatures of both parties and two independent witnesses.

What are the advantages and disadvantages of Loan Settlements?

It has the following advantages and disadvantages:

Advantages (Pros)

• 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 (Cons)

• 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.

Conclusion

A Loan Settlement Agreement is an important document that gives legal form to the loan settlement done with mutual consent between the borrower and the lender. When due to some reason the borrower is unable to repay the entire loan amount on time and the lender (bank or financial institution), understanding that situation, forgives the entire loan amount and settles for a certain amount, then in that situation it becomes very important to record this agreement as a document. This document is called Loan Settlement Agreement.

With the help of this document, the rights and responsibilities of both the parties are clearly written so that there is no dispute or misunderstanding in the future. It not only provides legal protection, but it also certifies that both the parties are accepting this agreement with mutual consent.

While drafting the Loan Settlement Agreement, it is important to take care of every small and big thing. Such as the identity of the parties, loan details, settlement amount, payment date, future waiver of liability, and dispute resolution, all these should be clearly written. Along with this, getting the signatures of witnesses and registering it on stamp paper makes this document stronger.

Frequently Asked Questions (FAQ’s)