Money issues can be stressful, particularly when loans accumulate and repayment is a challenge. If you are having trouble repaying your loan and seeking ways to alleviate your financial stress, Loan Settlement could be the answer. But what is it, and how does it work? Let’s demystify it in simple terms.
Understanding Loan Settlement
Loan Settlement is an option where the borrower approaches the lender or bank and settles a lower amount than the outstanding loan amount. This occurs when the borrower cannot pay back the loan amount due to circumstances like job loss, illness, or business closure.
In settlement of a loan, the creditor consents to accept a lesser amount of payment in one shot and considers the loan settled. It does not mean that the loan is “paid in full.” Rather, it is credited as “settled” on your credit report, which might have a negative effect on your credit score.
When Should You Use Loan Settlement?
Loan Settlement is not always the best. It is considered in most cases when:
- You have tried all the other repayment options such as restructuring or rescheduling your loan.
- Your financial condition renders it impossible to repay the full amount.
- The lender has previously accounted your loan as a Non-Performing Asset (NPA) due to repeated non-payment.
- You are receiving legal notices from the lender regarding non-payment.
How Does Loan Settlement Work?
If you are considering settling your loan, this is how the process typically works:
1. Evaluate Your Financial Situation
Prior to taking a decision on settlement, review your finances. Are you able to arrange a lump sum amount to give as settlement? If not, this choice might not be suitable for you.
2. Approach Your Lender
Contact your lender or bank and discuss your financial hardships. Certain lenders provide a one-time settlement (OTS) scheme under which they offer the opportunity to pay off the debt at a discounted price.
3. Negotiate the Terms
Lenders will negotiate, particularly if they realize that the borrower is genuinely unable to pay in full. Be prepared to provide documentation of financial hardship like termination of employment letters, medical expenses, or bank statements.
4. Have the Agreement in Writing
Once you and the lender have mutually agreed on a settlement amount, make sure that you receive a written document with the final settlement amount and the conditions. This prevents future conflicts.
5. Pay the Amount & Receive a No-Dues Certificate
Once you have paid the agreed amount, ask the lender to issue a No Dues Certificate (NDC) as evidence that the settlement has been made.
Pros & Cons of Loan Settlement
Like any financial decision, loan settlement has its advantages and disadvantages. Let’s look at both sides:
Pros:
- Reduces your financial burden by allowing you to pay a lower amount.
- Helps you avoid legal action from the lender.
- Gives you a chance to become debt-free sooner than expected.
Cons:
- Your credit score will drop, making it harder to get future loans.
- You may have limited access to credit for a few years after settlement.
- Banks could view you as a high-risk borrower and spoil your future prospects of obtaining loans.
Alternatives to Loan Settlement
If you are concerned about the ill effects of loan settlement, use these alternatives:
- Loan Restructuring: Ask your bank to change your repayment terms so that it becomes simpler for you to repay.
- Debt Consolidation: Merge several loans into a single loan with lower interest rates.
- Borrowing from Family or Friends: You can borrow from your friend or relative and avoid any legal issues.
Final Thoughts
Loan Settlement is a savior in very difficult financial conditions, but it must be your last option. If you are planning to opt for settlement, make sure you bargain effectively, have all the agreement terms in writing, and are cautious of its effect on your credit history.
If you are having trouble repaying the loan, it is always advisable to take advice from a financial advisor who can help you decide on the best possible option.
Have you ever been in a situation where loan settlement was your only option? Let us know in the comments below!