What is the difference between Loan Settlement and Loan Closure?

Summary

Loan Closure and Loan Settlement are both procedures of ending a loan, but they have many differences between them. Loan Settlement is performed when the borrower cannot repay the whole loan amount and settles with the bank, where the bank forgives some portion of the loan.

But this adversely impacts the CIBIL score and may make it difficult to get a loan in the future. It is generally carried out when the borrower is undergoing a severe financial crisis. Alternatively, Loan Closure takes place when the borrower repays the entire loan amount (interest and principal) and closes the loan completely.

After this, a No Objection Certificate (NOC) is issued by the bank, which proves that the loan has been fully repaid. Loan Closure has a positive impact on the CIBIL score, and there are no problems in getting a loan in the future. If you can repay the full loan amount, then loan closure is the best option as it provides financial stability and maintains your credit score.

Introduction

Loan Settlement and Loan Closure are both financial terms that relate to the final stage of a loan, but their meaning and processes are different. First of all, it is important to understand that whenever a person takes a loan, he takes the responsibility to repay it within a certain time. If, for some reason, he faces any difficulty in repaying the loan, then he can face two options: Loan Settlement or Loan Closure.

Loan Settlement happens when the loan is not repaid in full, and the borrower negotiates with the bank or financial institution and decides that he will repay a part of the loan and the rest will be waived off. In this process, the rest of the loan, which cannot be repaid in full, is waived off by the bank or lending agency.

On the other hand, Loan Closure means paying off the loan in full and ending it completely. When the borrower pays off his entire loan, including interest and any charges, the loan is closed. There is no compromise in the loan closure process; rather, the loan is made inactive by paying off the entire amount.

In this article, we will understand the difference between loan settlement and loan closure in detail. Both these processes are related to repaying the loan, but there are important differences between the two.

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 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 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”.

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

Let us understand both of these in detail:

• 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.

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 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 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 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.

How to choose the service of Loan Settlement?

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 for which you will have to pay extra.

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.

Make sure they are legally competent

You should also ensure that the service provider is legally recognized and aware of all the rights that are associated with the settlement of your loan. This will prevent you from facing any legal hassles in the future.

Consider other solutions as well

Before choosing the settlement process, make sure that the service provider also gives you information about alternative solutions like loan restructuring or new payment plans. These options can sometimes be better than a settlement and do not hurt your CIBIL score.

Customer support and communication

A good service provider will always stay in touch with the customer and resolve your problems properly. Make sure they answer your questions quickly and are ready to work with you in any difficult situation.

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 in settling 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.

What is the difference between Loan Settlement and Loan Closure?

Although the purpose of both is to end the loan, there are many differences between the two.

Loan Settlement

Loan Settlement occurs when the borrower cannot pay the entire loan amount and reaches a settlement with the bank or financial institution. In this situation, the bank or institution takes a lesser loan amount from the borrower and waives off the rest of the loan. In this process, the borrower has to pay a lump sum amount, which is less than the entire loan. This usually happens when the borrower is going through a financial crisis or his repayment capacity is not being met.

• What is forgiven? The rest of the loan.

• When does it happen? When the borrower does not have the full amount to repay the loan.

• Advantages: The borrower gets a part of the loan forgiven.

• Disadvantages: The CIBIL score may be negatively affected, and it may be difficult to take a loan in the future.

Loan Closure

Loan closure occurs when the borrower pays the entire loan amount, which includes both principal and interest. In this case, the loan is fully repaid, and the loan is closed by the bank or financial institution. When the loan is fully paid, the borrower is provided with a No Objection Certificate, which certifies that the entire loan amount has been repaid and the loan has been closed.

• Who is forgiven? There is no waiver, the entire loan amount is paid.

• When does it happen? When the borrower repays the entire amount.

• Advantages: The CIBIL score is positively affected, and there is no problem in taking loans in the future.

• Disadvantages: The entire amount has to be paid, which can sometimes be financially difficult.

Key Differences

• In a loan settlement, the borrower gets some amount of the loan waived off, while in a loan closure, the entire amount has to be repaid.

• Loan settlement can hurt the CIBIL score, while loan closure does not affect the score.

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 his debt waived off.

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

• Loan Settlement improves the financial condition of the borrower.

• 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 in 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 his freedom.

Conclusion

Both loan settlement and loan closure are the process of ending the loan, but there are many differences between the two. Loan settlement occurs when the borrower is unable to pay the entire loan amount and obtains consent from the bank or financial institution to waive some amount. In this process, some part of the loan is waived, but it can hurt the CIBIL score, and it may be difficult to take a loan in the future.

On the other hand, loan closure occurs when the borrower pays the entire loan amount, which includes both principal and interest. There is no waiver in this process, but when the loan is fully repaid, a No Objection Certificate (NOC) is issued by the bank, which proves that the loan has been repaid and is now over.

Frequently Asked Questions (FAQ’s)