Loan settlement is a crucial step for borrowers aiming to close their debt obligations, especially during financial strain. The settlement of loan involves repaying the amount—partially or in full—before the original tenure ends. This loan settlement process can help reduce interest costs and offer a practical solution for those facing repayment challenges. Understanding it is key to managing debt efficiently.
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 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.
The personal loan one time settlement option is usually offered to borrowers who present valid reasons for non-repayment, such as job loss, medical emergencies, or financial hardship. The extent of relief in a settlement personal loan case—like waiver of penalties, fees, or a portion of the principal—depends on the outstanding balance and the borrower's justification for default.
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.
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.
Difference between loan settlement and loan closure
While both terms may sound similar, loan settlement and loan closure have very different implications. Understanding this difference is essential to protect your credit score and manage your financial records accurately.
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 lower your credit score – Whether it's a secured loan or NBFC loan settlement, it signals incomplete repayment, affecting your creditworthiness.
- A one-time settlement reflects negatively – Settling a loan for less than the owed amount indicates financial distress to future lenders.
- Stays on your credit report for years – A settled status can remain visible for up to 7 years, impacting future credit approvals.
- May reduce chances of future credit – It can be harder to get approval for a credit card, mortgage, or personal loan after settlement.
- Essential to assess long-term impact – While it provides short-term relief, always consider the lasting effects on your financial credibility.
- Learn more about responsible borrowing and managing repayments with a personal loan from Bajaj Finance.
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. If you have a loan with an NBFC, you can also explore NBFC loan settlement as a last resort. 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 personal loan documentation to support your case, such as income proof or bank statements. Negotiate terms and obtain any settlement agreements in writing for clarity. For more details on the necessary documents, check out the personal loan documentation requirements.
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.
