Personal loans are preferred tools of financial aid that people resort to to get quick money to fulfill specific needs, including health care emergencies and the consolidation of debts. But not all buyers can afford to comply with the repayment plan. Errors in EMIs or financial crises may ultimately compel the borrowers to think about the settlement of loans.
Securing a personal loan in India is a legal and controlled procedure to clear a personal loan, yet it is associated with long-term effects. This blog will provide you with an in-depth examination of what a personal loan settlement process is, the steps involved, and the manner in which borrowers can use it to their advantage.
What is Personal Loan Settlement?
A personal loan settlement process is the process in which a borrower, unable to repay the full outstanding loan amount, negotiates with the lender to close the loan account by paying a lump-sum amount that is less than the total due. This is usually the case where the borrower is in a real hardship, like loss of job or illness, or any other unexpected event.
Notably, the settlement of a loan is not the same as the closure of a loan. Although the loan closure occurs at the stage when all the outstanding principal amount and interest are paid back, loan settlement occurs when a limited amount is paid to close the loan at a negotiated total.
When Should You Consider Loan Settlement?
Loan settlement should only be considered as a last resort. It is an option when:
- You are unable to make regular EMI payments due to financial distress
- You have exhausted all other avenues, like restructuring or refinancing
- You want to avoid legal proceedings or harassment from recovery agents
Remember, while settlement can bring short-term relief, it can impact your credit score negatively and affect your future borrowing capacity.
Step-by-Step Guide to Personal Loan Settlement Process
Step 1: Communicate with the Lender
If you are struggling to make payments, contact your lender immediately. Honest communication helps lenders assess your situation and offer possible solutions like EMI restructuring, moratorium, or a revised payment plan.
Step 2: Request a Loan Settlement Offer
If repayment is not possible despite alternate options, formally request a loan settlement. Provide supporting documents to prove your financial hardship, such as medical bills, termination letters, or income proof.
Step 3: Negotiate the Settlement Amount
The lender will review your request and may propose a settlement amount that is lower than your total outstanding balance. Negotiate the amount to ensure it’s feasible for you, and make sure to get this agreement in writing.
Step 4: Make the Lump-Sum Payment
Once both parties agree, make the payment in one go. Partial or delayed payments can nullify the agreement. After payment, request a No Objection Certificate (NOC) from the lender.
Step 5: Get the Loan Account Marked as “Settled”
After settlement, your loan account will be reported as “settled” to credit bureaus. This status stays on your credit report for up to seven years and may impact your ability to get future loans.
Documents Required for Loan Settlement
- PAN Card and Aadhaar Card
- Bank statements showing financial stress
- Proof of income loss or job termination
- Medical documents (if applicable)
- The settlement agreement was signed by both parties
- No Objection Certificate (after payment)
Consequences of Settling a Loan
While settling a personal loan may seem like a relief, it has long-term consequences:
1. Impact on Credit Score
A “settled” status is considered negative by credit bureaus and can reduce your score significantly. This may result in:
- Higher interest rates in the future
- Rejection of credit card or loan applications
2. Legal and Financial Implications
If the terms of the settlement are not fulfilled, lenders can initiate legal action. Also, you may have to pay taxes on the waived amount in some cases.
How to Avoid Loan Settlement
- Opt for smaller loan amounts based on your repayment capacity
- Choose longer tenures for affordable EMIs
- Maintain a strong emergency fund
- Explore restructuring before considering settlement
Common Myths Around Loan Settlement in India
When it comes to loan settlement, many borrowers fall prey to myths that can further complicate their financial journey.
Myth 1: Settlement Clears Your Credit History
Many believe that once the settlement amount is paid, their credit report will be clean. However, the account is marked as “settled,” not “closed,” which stays on your credit report for up to seven years. Lenders view this negatively and may hesitate to offer loans in the future.
Myth 2: All Lenders Offer Settlement Options
Not all financial institutions provide loan settlement as an option. Some may choose to pursue legal remedies or write off the loan, which can still impact your credit score.
Myth 3: Settlement and Waiver Are the Same
Loan waivers are rare and usually provided by governments or in special circumstances. Settlement, on the other hand, is a mutual agreement and requires partial payment from the borrower.
Understanding these nuances can prevent poor decision-making and lead you toward more responsible borrowing and repayment behaviour.
Alternatives to Settlement: What Borrowers Can Do
Before opting for settlement, borrowers should evaluate all alternatives. Here are a few practical strategies:
1. Loan Restructuring
Many lenders, especially post-pandemic, allow borrowers to restructure their loans by extending the tenure or reducing EMIs temporarily. This helps ease the burden without damaging your credit profile
2. Balance Transfer
If you have multiple high-interest loans, consider consolidating them with a balance transfer to a lower interest rate lender or a fintech.
3. Emergency Fund Withdrawal
Using your contingency savings or a small gold loan can help clear dues and avoid settlement. It’s always better to repay in full than to settle.
Choose Smarter Credit with Stashfin
Understanding the personal loan settlement process is essential for any borrower facing financial stress. While settlement offers temporary relief, it can hinder your credit health in the long term. Always consider it as the last option after exploring restructuring, refinancing, or alternate credit platforms like Stashfin. With features like digital application, quick disbursement, and custom EMIs, Stashfin offers smarter credit solutions that reduce the chances of default in the first place.
Visit Stashfin to learn more about their tailored offerings for financially responsible borrowing.