If you are having trouble paying your loan because of financial hardship, a loan settlement with your bank may be an option. Loan settlement enables you to pay less and settle your outstanding balance, avoiding further legal action and financial strain. But it needs carefully planned strategy and negotiating skills to secure the most favorable outcome.
What Is Loan Settlement?
Loan settlement or debt settlement refers to the mutual understanding between the lender and borrower in which the borrower makes payment of an amount less than the outstanding balance in one single go. The borrower and the lender mutually accept that the latter receives the paid lesser amount in place of the complete outstanding loan balance.
When You Should Think Loan Settlement
Loan settlement can be an ideal decision in the below-mentioned cases:
Financial Difficulty: You are experiencing a serious financial difficulty resulting from loss of job, medical situations, or other unforeseen expenses.
Default on EMIs: You have previously defaulted on several EMIs, and paying back in full is impossible.
Pressure from the Lender: You are under constant recovery calls or facing legal action from the lender.
No Other Debt Settlement Options: Options such as restructuring, refinancing, or balance transfer are not an option.
Steps to Negotiate a Loan Settlement with Your Bank
Loan settlement negotiation is a process that needs preparation and patience. The following are steps to guide you through the negotiation process:
- Evaluate Your Financial Condition
Before you visit your bank, review your financial status to find out how much you can settle as a lump sum. Get information about your income, expenditure, and current debts to be able to provide a clear presentation to the bank.
- Avoid Partial Payments
If you are having trouble with loan payments, keep in mind that making partial payments may not be in your interest. Banks typically only consider settlements when they think the borrower cannot pay the full amount.
- Call the Bank’s Loan Settlement Department
Reach out to the bank’s loan recovery or settlement department to express your willingness to settle the loan. It’s advisable to communicate in writing via email or an official letter to maintain records of all discussions.
- Explain Your Financial Hardship
Provide valid reasons for your inability to repay the full loan amount. Medical emergencies, job loss, business failure, or other financial struggles should be clearly explained. Supporting documents such as medical bills, termination letters, or financial statements can strengthen your case.
- Negotiate the Settlement Amount
Banks generally agree to settle for 40-60% of the outstanding amount. Start by offering a lower percentage and be prepared for counteroffers. If possible, involve a debt settlement expert to negotiate on your behalf.
- Request a Favorable Credit Report Entry
A settled loan is indicated as ‘settled’ in your credit report, which adversely affects your credit score. Attempt to negotiate with the bank to indicate it as ‘closed’ rather than ‘settled’ to cause less harm to your credit profile.
- Obtain the Settlement Agreement in Writing
After the settlement amount is finalized, make sure you obtain a written agreement from the bank that includes the following information:
Final settlement amount
Payment due date
No future dues or obligations after payment
Confirmation of the closure of the loan
- Pay as Agreed
Make sure that you pay on time within the agreed period. If the bank permits, take a one-time lump sum settlement, as chances of getting a good settlement are higher.
- Take a No Objection Certificate (NOC)
After paying the settlement amount, ask for a No Objection Certificate (NOC) or loan closure certificate from the bank. This certificate is proof that the loan has been settled and can be used to settle any future disputes.
- Check Your Credit Report
Verify your credit report after some time to check if the bank has reported the loan status accurately. If errors are found, contact the bank and the credit bureaus for rectification.
Advantages and Disadvantages of Loan Settlement
Advantages:
Reduces financial pressure by enabling partial repayment.
Prevents legal action from the lenders.
Brings instant relief from recovery agents.
Disadvantages:
Deducts from credit score.
Limits future borrowing possibilities.
Potentially triggers tax on the amount waived.
Loan Settlement Alternatives
Before choosing a loan settlement, keep these options in mind:
Loan Restructuring: Negotiating reduced EMIs or a longer tenure.
Debt Consolidation: Availing a new loan to settle several debts.
Balance Transfer: Transferring your loan to a different lender with more favorable terms.
Seeking Legal Advice: Consulting legal experts to find equitable repayment options.
Final Thoughts
Negotiating a loan settlement with your bank takes patience, tactical negotiation, and proper documentation. Although it offers temporary relief, it has long-term effects on your credit score. Prior to selecting this option, review all available alternatives and seek financial experts’ advice to make the most informed decision for your future finances.