Loan settlement is an option worth considering if you are having a hard time repaying loans and are keen on reducing the debt burden. However, banks are rarely easy to deal with when it comes to negotiating an agreeable settlement. Banks have their rules and procedures, but depending on your attitude, you may improve your chances for a favorable settlement.
This blog will take you through the step-by-step negotiation process with the banks for loan settlement, along with helpful tips from the experts for a smoother process.
What is Loan Settlement?
Loan settlement is where a borrower, unable to pay back the full loan amount, negotiates with the bank to pay an agreed reduced amount. The remaining portion of the amount claimed from the borrower is waived off and thus becomes the effective settlement of dues. This usually happens whenever the borrower is under financial distress and has skipped several installments of EMIs.
But again, it will have a detrimental effect on your credit score, and hence, one must resort to this option only when all else fails.
Steps to Negotiate Loan Settlement with Your Bank
1. Analyze Your Financial Status
You must carefully inspect your financial circumstances before making any approach to the bank. Get to know how much you can afford as a lump sum settlement. If you have a realistic offer to make based on your financial condition, the bank will consider this and be more ready to negotiate towards your offer.
2. Contact Your Bank’s Debt Recovery Department
After determining how you would settle, you should reach out to the bank, to the loan recovery or debt settlement department. It is always best to do it in writing (either via email or letter) so you have some basis of reference in case an issue arises later on.
3. Explain Your Financial Hardship
Banks are more inclined to agree to loan settlements when a borrower is genuinely hard put due to job loss, medical emergencies, or failure of the business. Be honest about your hardships, and support this with documents if necessary.
4. Bring to the Table a Reasonable Settlement Amount
Banks settle for anywhere between 30-70% of the remaining principal loan amount depending on the borrower’s situation. Offer an amount you can manage to pay, which should give you some negotiating room. A lump sum paid in one go is more enticing to banks than having them wait for you to pay small installments over a long period.
5. Bargain for Better Terms
Negotiation is imperative for the loan settlement process. While the banks will try to recoup as much money as they can from a settlement, you will want the smallest settlement possible. Here are some pointers for effective negotiation:
Respectful, but firm.
- Emphasize your financial hardship.
- Express willingness for the lump sum payment.
- Propose the lower amount for settlement and prepare for counteroffers.
- Request for waiver of penalties and interest charges.
6. Request a Written Settlement Agreement
Once an agreement on the settlement amount is reached, the bank must be asked for a written agreement. Important contents of this document should include:
- Settlement amount as agreed.
- The bank shall not pursue the remaining loan amount.
- Bank will update the credit bureau.
7. Make the Payment Keep Proof
Once payments are finalized within the agreed period, be very certain to make the payment, and ensure to get a receipt or proof of transfer to avert any dispute in the future.
8. Assess Accordingly for Your Credit Report
Loan settlement can adversely affect your CIBIL score (credit score). Therefore, after settlement, check that your credit report reflects the status update from the bank. In case of discrepancies, the bank must be contacted with a request for correction.
Common Mistakes to Avoid in Loan Settlement
- Not arguing enough: Borrowers occasionally concede to the first offer that the bank presents, although that might not be the best deal.
- Not asking for a written settlement agreement: This is extremely important since in this case, your verbal agreement means nothing at all.
- Not checking your credit history after the settlement: There are cases when banks do not update the credit bureau, making your credit score suffer longer than it should.
- Ignoring future financial planning: Once you deal with a settled loan, set about rebuilding your credit score and managing your finances better so as to avoid occurrences of the same kind in case of incurring future debts.
Final Thoughts
Negotiating with banks for loan settlement is time-consuming, full of frustrations, and requires proper planning. If you are having trouble making loan repayments, be honest with the bank, make a sound settlement offer, and ensure that everything is documented. Loan settlements provide a relief in times of financial crises; however, working toward better financial stability to avoid such situations in the future should be taken seriously.
Are you looking for expert intervention on loan settlements? Talk to a financial consultant or loan settlement expert to gain professional input geared toward enhancing your negotiation power.