When should Personal Loan Settlement be done and when not?

Summary

Personal Loan Settlement is an option that is adopted when the borrower is unable to repay the full amount of the loan. In this, the bank or financial institution allows the borrower to repay a certain amount so that the loan account can be closed. Yet, before doing so, it is also crucial to know its pros and cons.

Settlement of the loan must be considered when your financial condition is so poor that there is no chance of paying back the loan, like losing a job, going into deep debt, or having a serious emergency. If you are aware that your income will not increase soon and the threat of legal action by the bank is growing, then this is an option.

But, if your financial condition is slightly tough but can be controlled, then settlement of the loan should be avoided. This reduces your credit score, and it might become tough to obtain a home loan, car loan, or credit card in the future. However, you may use other options, such as restructuring the loan, lowering EMI, or balance transfer.

Introduction

Today, a large number of people avail of personal loans to meet their requirements, but at times, due to financial crises or for any other reason, it becomes hard for them to repay it within time. At that point, banks or lending institutions offer the facility of loan settlement, which can bring relief to the borrower. But Loan Settlement is not an appropriate choice in all cases.

Personal Loan Settlement implies that the borrower is permitted to repay a particular amount rather than the total pending amount so that the loan account is closed. This facility is for those individuals who cannot return the whole amount of the loan due to financial constraints. Despite this solution having an easy-looking nature, it has negative effects, too. 

Loan settlement can affect your credit score, which may cause problems in getting new loans or credit cards in the future. Therefore, it is important to understand in which circumstances it would be right to do a loan settlement and in which circumstances it should be avoided. For example, if your financial condition is completely bad and there is no possibility of repaying the loan in the future, then this can be an option. But if you can repay the loan by doing a little hard work or using other financial means, then it would be better to avoid settlement.

In this article, we will understand in detail when a Personal Loan Settlement should be done and in which situations it is not the right decision. This will help you make an informed decision and secure your financial future.

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 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.

What documents are required for a Personal Loan Settlement?

The following documents are required:

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

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

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

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

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 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 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.

How to choose the service of Personal Loan Settlement?

If you, too, are stuck in the debt cycle and are under a financial crisis and wish to opt for the Personal Loan Settlement path, then you can opt for our Loan Settlement service. We will assist you in settling your loan. Besides this, we give you relief from the loan burden in 6 – 8 months. If you wish to get more information regarding our service, then you may contact us.

What is the fee for settling a personal loan?

If you join our service, we settle your loan within 30% of your total outstanding loan. Along with this, we also charge some fees for settling your loan, which is usually 12% of your total outstanding loan.

For example, suppose you have an outstanding loan of Rs 1 lakh; then we will settle it for 30% of it, i.e., Rs 30 thousand, and as a fee for this, we will charge 12% of your total outstanding loan,i.e., Rs 12 thousand. That is, your loan of Rs 1 lakh will be settled for a total of Rs 42 thousand.

How long does it take for a Personal Loan Settlement to be processed?

If you join our service, we settle your loan within 6 – 8 months. But it also depends on your loan outstanding, how much loan is outstanding on you. If you have a large loan outstanding, then it may take us 1 to 2 years to settle it.

When should you go for a Personal Loan Settlement, and when should you not?

Before adopting it, it is important to understand in which circumstances it is the right option and in which situations it should be avoided.

When should you go for it?

• If your financial condition has deteriorated and there are no other means left to repay the loan, then a loan settlement can prove to be a better option.

• Such as losing a job, serious illness, or any other emergency.

• If you do not need any loans or credit cards in the future, then the impact of the settlement may be less for you.

• If the bank has sent repeated reminders to repay the loan and the possibility of legal action is increasing, then settlement can be considered.

• If the interest rate on your loan has become very high, and your EMIs are increasing, then settlement can provide relief.

• If you are planning to gradually improve your credit score after loan settlement, then this can prove to be a strategic move.

When not to settle?

• If you are expecting an increase in your income after a short time, avoid settlement, as it may harm your credit score.

• If you can get the option of reducing EMI or loan restructuring from the bank.

• Many times, banks offer the facility of loan restructuring (reducing EMI, increasing loan tenure), which is better than settlement.

• After a loan settlement, your credit score falls, which may prove difficult to take a loan in the future.

• If you can repay the entire loan amount with a little effort, avoid settlement, as it may spoil your credit profile.

• If the bank puts a status of ‘settled’ in your credit report after settlement, it may create financial problems in the future. Always ensure that it is shown as ‘close. ‘.

What are the advantages and disadvantages of Personal Loan settlements?

It has the following advantages and disadvantages:

Advantages (Benefits)

• 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.

Disadvantages (Drawbacks)

• 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.

Conclusion

A Personal Loan Settlement is an important financial decision that needs to be considered deeply before taking it. It is an option that provides immediate relief to the borrower, but it also has long-term implications. Your credit score may drop after settlement, which may make it difficult to get a loan or credit card in the future. Hence, it is necessary to know under what conditions loan settlement would be appropriate and under what conditions it should be avoided.

If you are also in financial hardship but if there is hope of repaying the loan one day, then go for any other alternative and not a settlement like altering the EMI, availing a loan restructuring, or availing a moratorium for some period. However, if your financial situation worsens to a point where the repayment of the loan seems a near impossibility, then there is a potential solution in settlement of the loan.

It is essential to obtain full information from the bank or financial institution before making a loan settlement. Know the settlement terms, obtain a written document, and make sure that after the settlement, your credit report reflects it as ‘Closed’ and not ‘Settled. ‘Also, if feasible, obtain a NOC (No Objection Certificate) from the bank so that there are no issues in the future.

Frequently Asked Questions (FAQ’s)