Loan settlement alternatives

Before proceeding with a loan settlement, it’s critical to investigate other options for relieving financial stress without resorting to a settlement.

Before the borrower choose to go ahead with a loan settlement, it’s critical to evaluate other options as well. Since loan settlement has a negative impact on creditworthiness, it is important to explore other options.

• Loan Restructuring / Modification
  Loan restructuring or modification involves altering the original terms of a loan to make repayment more manageable for the borrower. This may include extending the loan tenure, reducing the interest rate, or converting unpaid dues into a separate loan. It is typically offered during financial distress to help prevent default. While it provides relief, it may also impact the borrower’s credit score and could involve fees or documentation as part of the renegotiation process with the lender.
• Loan Moratorium / Deferment
  A loan moratorium or deferment is a temporary pause on loan repayments, granted during periods of financial hardship or systemic disruptions like natural disasters or pandemics. During this period, borrowers are not required to make EMI payments, though interest may continue to accrue. It offers short-term relief and preserves liquidity but may increase the total repayment burden over time. Borrowers must resume repayments once the moratorium ends, often with adjusted EMIs or an extended loan term.
• Debt Consolidation
  Debt consolidation involves combining multiple debts—such as credit cards, personal loans, or overdrafts—into a single loan, ideally with a lower interest rate or longer repayment term. This simplifies repayment, reduces the chance of missed EMIs, and may lower overall interest costs. It helps improve financial discipline by centralising debt under one lender. However, it requires good creditworthiness to secure favourable terms and may incur processing fees or result in longer repayment periods if not managed properly.
• Negotiated Repayment Plan (without settlement)
  A negotiated repayment plan is an agreement between a borrower and lender to revise payment terms without settling the debt for less than owed. Unlike debt settlement, it retains the full principal but may involve rescheduling EMIs, waiving penalties, or reducing interest rates. It helps borrowers regain control without harming their credit profile significantly. This approach is often used when the borrower shows intent and capacity to repay but needs flexibility due to temporary cash flow constraints.
• Credit Counseling or Debt Management Plan (DMP)
  Credit counselling or a Debt Management Plan (DMP) is a structured financial programme facilitated by certified credit counsellors to help individuals manage and repay unsecured debt. The counsellor negotiates with creditors for reduced interest rates, waived fees, or extended tenures. Borrowers then make a single monthly payment to the agency, which disburses funds to creditors. While not a loan, a DMP aids disciplined repayment and can improve financial literacy. However, it may limit access to new credit temporarily.