Negotiating a Personal Loan Settlement: Here is What You Need to Know

A financial setback can hit you anytime. You may have lost your job or suffered a major loss in your business. This can make it very hard for you to manage your EMIs. In such a case, you may consider the option of loan settlement. A loan settlement can help you avoid legal ramifications and penalties. It has both advantages and disadvantages. You must know the consequences of a loan settlement before applying for one. Being informed will also help you negotiate better terms with your lender during the settlement process.
 

What is loan settlement?

Debt settlement is an agreement between you and your lender. In this agreement, you request your lender to accept a one-time payment due to your poor financial situation. The amount you are willing to pay here is usually less than the total amount owed.
 
Here is an example. 
Let’s assume that you availed a Rs 5,00,000 personal loan with a five-year repayment period at 12% interest rate. After paying EMIs for the first three years, your total EMIs paid to date are Rs 4,00,392. The current outstanding balance is Rs 2,66,941. However, due to financial constraints, you are unable to repay the remaining balance and can only pay Rs 1,50,000. In case the lender accepts your offer, your debt gets settled.
 

How to negotiate a personal loan settlement?

 
Debt settlement negotiations can significantly reduce your financial burden. But, before proceeding with the steps, you must first ask yourself the following questions.
 

• How much can I manage to pay in debt settlement?
• Do I need debt in the future?
• How much would the credit hit cost me?

Steps involved in personal loan settlement process —

 

• Know your debt

  Before you connect with your lender for debt settlement, calculate how much you have already paid and how much you still owe. Use an amortisation table to understand the interest component and outstanding principal. Determine how much you can afford to repay. If your settlement amount covers most of the outstanding principal, the lender might not hesitate to close your account.
   

• Have a repayment plan

  Debt settlement necessitates a lump sum payment. It is difficult to make financial arrangements when you are already dealing with a financial crisis. You can pay the settlement amount with a recently matured investment or with an office bonus.
   

• Contact your lender

  Contact your lender's branch office and speak with one of their executives. Inform them of your financial situation. No lender wants the debt to be classified as a non-performing asset on the books (NPA). So, if you can show proof of your poor financial situation, the lender may be willing to accept your offer.
   

• Make a Formal agreement

  Participating in a debt settlement process over verbal communication is a no-no. You must complete the formal loan closure form with the proper signature of you and the lender's authorised signatory. The official letter you attach to the form must include the amount you are willing to pay as well as the reason you chose debt settlement. Keep a copy of the letter with you for future reference.
   

• Clear your settlement payment

  Make the loan settlement payment after completing the preceding steps. Avoid paying in cash. Use cheque payments to keep track of your payments. This will help you avoid any discrepancies in the future.
   

• Check your credit score

  Most of the time, the lender neglects to send a loan closure report to the credit bureaus. When such things happen, the credit score suffers significantly. Following the loan's settlement, go to the credit bureau's official website to get your updated credit report. Check if the settlement has been reported there. If so, double-check the settlement amount to ensure it is the same as the lender agreed to when the contract was signed. Upload a copy of the NOC and any other supporting documents if there is a discrepancy.
   

Also Read: Planning to Pre-Close Your Personal Loan? Check When It Would Be a Good Option
 

Advantages of loan settlement

  
Loan settlement is not always a bad idea. It can be beneficial in the following ways.
 

• Avoiding default

  If you default on your loan, you could face a slew of serious consequences. The most common of these are asset seizure, legal action, and a significant drop in your credit score. However, if you enter into a loan settlement agreement with your lender, you can avoid these negative consequences.
   

• Lowers repayment amount

  If you had availed a larger loan in the past and are now having trouble managing your debt, debt settlement can lower your payment to a level making it affordable for you.
   

Consequences of debt settlement 

 

• When you choose debt settlement, you pay a much lower amount than you actually owe. The scenario eventually leads to the deterioration of your creditworthiness and a drop in your credit score.

 

• A loan settlement reflects your poor repayment ability and is recorded in your credit report, where it will remain for years. As a result, if you intend to apply for a larger sum loan in the future, you may not be approved.

 

Should I go for a debt settlement?

 
Ideally, debt settlement should be your last resort because it severely impacts your budget. Here are some of your alternatives to loan settlement.

 

• Use liquid assets to repay your outstanding personal loan. Liquidate your short-term investments, such as fixed deposits, mutual funds, or stock investments, and use the profit to repay your debt.

 

• If the higher interest rate is making it difficult to manage your debt, consider a balance transfer. Look for other lenders in the market who are willing to offer you a low-interest loan.

 

• Request your lender to extend your repayment period. It will substantially reduce the EMI amount while making payment easier on your wallet.
   

• If you have several outstanding debts, instead of settling on a single loan, try to obtain a low-interest personal loan to consolidate all of your debts and repay them all at once.

 

• Set aside a portion of your savings every month to maintain an emergency reserve. When confronted with a financial crisis, emergency funds come in handy.

 
Also Read: Things to Know While Closing a Personal Loan
 

To conclude

Debt settlement should only be used as a last resort. It is the best option only if you anticipate a bankruptcy situation. When considering a loan settlement, carefully examine your finances to determine how much repayment you can afford. You must also check your outstanding loan components and learn about the steps involved in the settlement process. Following the completion of the settlement process, check your credit report for any discrepancies on the credit bureaus' websites.