What is the legal process of loan settlement?

Summary

Loan Settlement is a process in which the bank and the borrower mutually agree to settle the outstanding loan amount by reducing it. It proves useful for those who are unable to repay the entire loan due to financial problems.

If a borrower fails to pay EMI for 3 to 6 months continuously, the bank can term him a defaulter and prosecute him under the SARFAESI Act, 2002. As a remedy in such a case, the borrower can ask the bank for a One Time Settlement (OTS). 

After settlement, the bank issues a No Dues Certificate (NOC), which certifies that the loan has been settled. However, it is important to note that a loan settlement hurts the CIBIL score, which may make it difficult to get a loan in the future.

Introduction

Nowadays, due to rising inflation and economic challenges, many people take loans, but sometimes, it becomes difficult to repay the EMI on time. In such a situation, banks and financial institutions offer the option of loan settlement. But do you know that there is a legal process of loan settlement, which is very important to understand?

When a borrower is not financially capable of repaying the entire loan, the bank or lender proposes a settlement. In this, a settlement is made by paying a part of the total outstanding amount of the loan so that the bank recovers some of its money, and the borrower also escapes the burden of paying the entire amount.

Before doing a loan settlement, the bank goes through many legal processes. If the borrower is unable to pay the EMI continuously, then under the SARFAESI Act, 2002, the bank gets the right to take legal action to recover the outstanding amount. Apart from this, there are processes like Negotiated Settlement and One Time Settlement (OTS) through which the loan is settled.

In this article, we will explain the entire legal process of Loan Settlement, its advantages and disadvantages, necessary documents, and necessary steps in detail so that you can settle your loan properly and avoid any legal problems.

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 Loan 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 Loan Settlement 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 Loan 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.

The longer this entire process continues, the more it can impact your CIBIL score, so it is preferable to resolve the issue sooner.

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.

• 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 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.

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.

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.

Request 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.

Loan 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.

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. Note that this is a very important legal document, so read it carefully and consult your lawyer.

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.

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. Without an NOC, the loan settlement is considered incomplete, so it is very important to get it.

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.

Conclusion

Loan Settlement can prove to be a good option for those who cannot repay the full amount of their loan due to some reason. But this is not an easy process; rather, many legal and financial aspects are involved in it. If you are thinking of doing a Loan Settlement, then first of all, you should understand its entire legal process.

When a borrower is unable to pay the loan EMI for a long time, the bank declares him a defaulter. After this, the bank or financial institution takes steps to legally recover its outstanding amount. Under laws like the SARFAESI Act, 2002, the bank gets the right to seize your mortgaged property and auction it.

Loan Settlement does not mean that the bank will waive the entire amount. Rather, it is a kind of agreement in which the bank can leave some amount, and you have to pay the remaining amount within the stipulated time. The most important document in this entire process is the Settlement Agreement, in which the terms of settlement are written.

Frequently Asked Questions (FAQ’s)