Loan settlement is an essential procedure that debtors may need to go through while closing their debt. The loan settlement process refers to the procedure of repaying a loan in full before the scheduled loan tenure ends. It helps borrowers clear their debt obligations earlier and potentially save on interest costs.
Understanding the loan settlement process is important for borrowers seeking to resolve outstanding loans, whether due to unexpected circumstances or financial difficulties.
What is personal loan settlement?
The personal loan settlement process involves reaching an agreement between a borrower and a lender to resolve a loan by repaying the outstanding loan amount.
In the settlement of loan process, you request the lender to accept a one-time payment due to your poor financial situation. The amount you are willing to pay here is generally less than the total outstanding amount owed.
This option is typically available to borrowers who can provide valid reasons and adequate support for their inability to repay, such as medical emergencies, job loss and more. The extent of relief granted by the lender, including waiver of processing fees, penalties, or even a portion of the principal amount, depends on factors such as the borrower's reasons for loan settlement and the balance loan amount.
What are the benefits of a personal loan settlement?
Here are some of the key benefits of a personal loan settlement:
- Debt relief
Personal loan settlements provide borrowers with the opportunity to resolve their debts by paying a reduced amount compared to the full balance owed. This significant reduction in the debt burden can bring immense relief to borrowers who are facing challenges in debt settlement. - Accelerated debt resolution
The loan settlement process offers a quick approach to getting out of debt. When borrowers are unable to meet long-term payment requirements, loan settlement might be more efficient option. By obtaining a loan settlement, borrowers can accelerate the process of becoming debt-free in a shorter timeframe than the initial loan terms.
- Avoiding default
If you default on your loan, you could face a lot of serious consequences. Asset confiscation, legal action and a major decline in your credit score are the most frequent of these. However, you can prevent these negative consequences if you and your lender sign into a loan settlement agreement.
Disadvantages of loan settlement
Opting for a loan settlement can provide temporary relief but comes with several drawbacks:
- Impact on credit score: Loan settlement significantly lowers your CIBIL score, making it harder to secure future loans or credit cards.
- Stigma in credit history: It reflects negatively on your credit report, showing you as a risky borrower.
- Limited access to credit: Post-settlement, lenders may deny future loans or offer them at higher interest rates.
- Not a full resolution: Settling a loan means the lender waives a portion of the amount, but the remaining balance is not fully paid, leaving a negative mark.
- Legal and recovery issues: If terms are not clearly agreed upon, there may be legal issues.
- Higher costs in the long run: Additional penalties, charges, or fees associated with the settlement process can make it costly.
Instead of loan settlement, you can explore restructuring or partial payments to maintain creditworthiness.
What is the loan settlement process?
The loan settlement process entails several steps that must be completed to negotiate and achieve an agreement with the lender regarding the repayment of a personal loan. While the process may differ based on the lender and individual circumstances, the steps listed below provide a basic overview of the loan settlement process:
- Access your financial situation
Start by evaluating your financial situation and deciding whether you're capable of repaying the loan. Understand your financial capacity by analysing your income, expenses and existing debts.
- Contact your lender
Speak with a representative from your lender's branch office. Tell them about your financial position. No lender wants the loan to be recorded as a non-performing asset (NPA). As a result, if you can produce proof of your poor financial situation, the lender may be willing to negotiate terms of settlement. - Negotiate settlement terms
Engage in settlement negotiations with the lender to decide the specifics of the loan settlement. This includes addressing the settlement amount, repayment choices and penalty. - Reach an agreement
Once both parties have agreed on the settlement conditions, make sure that everything is in writing. This contains the settlement amount, payback timeline and any loan terms or changes. - Make the settlement payment
Make the agreed-upon payment to fulfil your settlement agreement. This could be in the form of a flat sum payment or a structured repayment plan. You must pay back on or before the agreed-upon deadline. - Monitor your credit report
Check your credit score on a regular basis to confirm that the settled loan is correctly reported. If there are any discrepancies, contact the credit bureaus to have the information corrected.
Difference between loan settlement and loan closure
Aspect |
Loan settlement |
Loan closure |
Definition |
Partial payment accepted by the lender to close the loan. |
Full repayment of the loan amount as per the agreement. |
Impact on credit score |
Negative impact due to unpaid portion. |
Positive impact for completing the loan. |
Credit report |
Marked as "settled," indicating partial payment. |
Marked as "closed," indicating full payment. |
Future credit |
Reduces chances of getting loans or credit cards. |
Improves credibility with future lenders. |
Financial outcome |
Involves waiving part of the outstanding amount. |
Clears the entire outstanding balance. |
Cost implications |
May include penalties and fees. |
No extra charges if paid on time. |
Understanding these differences can help you make informed decisions about your financial obligations.
Impact of loan settlement on your credit score
Loan settlement can have a significant impact on your credit score. Secured loan settlement, NBFC loan settlement, or any type of loan settlement has a negative impact on your credit score. While it may relieve the immediate financial burden, settling a loan for less than the full amount owed can negatively affect your creditworthiness. It may result in a lower credit score and remain on your credit report for several years, signalling to lenders that you failed to fulfil the original loan agreement. Consequently, obtaining new credit or favourable terms may become challenging, impacting your ability to secure a personal loan, credit cards, or mortgages in the future. Therefore, it's essential to weigh the long-term consequences before opting for loan settlement.
Should you settle your loan?
While it may seem to be the easy way out, especially given the reduced loan settlement amount, it may not be the right choice to make. It is advisable not to opt for a loan settlement. You can, however, look at some alternatives to continue with your loan repayment. You can explore liquidating some of your assets like fixed deposits, mutual funds, etc. Alternatively, you can also speak to your lender and get an extension on the loan tenure. Other options include pledging some valuables as security or mortgaging some assets. It is only when you have evaluated all these alternatives and have run out of options should you opt to pay the loan settlement amount.
How does loan settlement impact the borrower?
A loan settlement reflects your inability to pay off your debt and can have a massive impact on your credit score. Due to this you may face challenges when you need a loan in the future. Borrowers evaluate your creditworthiness before processing your loan application, and a low credit score may result in rejection of your application or unfavourable terms like high interest rate.
How to negotiate a personal loan settlement?
When negotiating a personal loan settlement, assess your financial situation, determine a realistic settlement amount, and communicate openly with the lender about your challenges. Be prepared to provide documentation, negotiate terms and obtain any settlement agreements in writing for clarity.
How to build good credit after loan settlement?
Rebuilding good credit after a loan settlement requires strategic steps. Start by obtaining a secured credit card, using it responsibly, and making timely payments. Additionally, diversify your credit mix by applying for a small instalment loan or a credit-builder loan. Ensure all payments are made on time and keep credit utilization low. Regularly monitor your credit report for accuracy and dispute any errors. Patience is key as rebuilding credit takes time. By demonstrating responsible credit behaviour and maintaining financial discipline, you can gradually improve your credit score and regain the trust of lenders after a loan settlement.
Important things to do before opting for a loan settlement
Before opting for a loan settlement, it's crucial to assess your financial situation thoroughly.
- Evaluate: Evaluate your ability to repay the loan in full or explore alternative repayment options before you choose to settle personal loan.
- Negotiate: Communicate with the lender to negotiate terms, such as reduced interest rates or extended repayment periods, before considering settlement.
- Know the impact: Understand the potential impact on your credit score and long-term financial health.
- Check with experts: Consult with a financial advisor or credit counselor to explore all available options and make an informed decision.
- Review: Finally, review the settlement agreement carefully, ensuring all terms are clearly understood and agreed upon before proceeding with the settlement process.
Bajaj Finance Limited offers personal loan of up to Rs. 55 lakh with several benefits. It comes with simple personal loan eligibility criteria and minimal document requirements. Borrowers can also access our customer portal- My Account, to manage their loan, check repayment history, close their loan, and take advantage of a variety of other services.
