Having trouble paying your loan? Loan settlement may be an option to relieve your financial pressure. But is it suitable for you? Let’s put it in plain words.
What is Loan Settlement
Loan settlement is a deal between a borrower and a lender where the borrower pays less money to settle their loan amount. This is generally done when the borrower is unable to repay the entire loan amount due to some financial problems.
Lenders provide loan settlement as a final option to get back some of their money rather than losing it all. After being settled, the loan is reported as “settled” in your credit report, which is not the same as being reported as “closed” (which occurs when a loan is paid off in full).
How Does Loan Settlement Work?
The process of loan settlement typically includes the following steps:
1. Evaluating Your Financial Situation
If you are having trouble paying your EMIs and have defaulted on several payments, lenders will consider your case for settlement of the loan. This typically occurs when all other payment alternatives, such as loan restructuring or moratoriums, have been utilized.
2. Negotiating with the Lender
After you notify the bank or financial institution of your financial hardships, they may make a settlement. That is, they may be willing to take a lump sum payment that is less than the amount due.
3. Accepting the Settlement Offer
The lender will propose a reduced amount that they are willing to accept. This amount is usually lower than the total outstanding but should be paid as a lump sum within a given time.
4. Making the Settlement Payment
After you accept the settlement, you will have to pay the agreed sum in a lump sum. Once the payment is done, the lender will record the loan as “settled” in your credit report.
5. Credit Score Impact
Settlement of a loan affects your credit report negatively. By accepting anything short of the whole amount, you are demonstrating to potential future lenders that there’s financial difficulty involved. That might make getting a loan tougher later on.
When Should You Pursue Loan Settlement?
Loan settlement is not the right decision for everyone. Consider it only if:
- You are experiencing acute financial hardship like loss of job, illness, or business losses
- You have already availed all other options of repayment like restructuring the loan or extending the term
- The lender is making a settlement which you can comfortably repay in lump sum
Advantages and Disadvantages of Loan Settlement
Advantages
- Lower Financial Burden – You are paying less than what you originally had to
- Better Negotiating Power – Lender negotiates since it’s easier to accept less rather than pursuing court case
- Avoid Legal Action – Settlement helps you avoid lawsuits or recovery agents
- Immediate Relief – Once settled, you no longer have to worry about the loan
Cons
- Negative Impact on Credit Score – Your credit report will show the loan as “settled” instead of “closed,” which can reduce your chances of getting future loans
- Not a Guaranteed Option – Lenders are not obligated to offer a settlement
- Possible Tax Implications – The forgiven amount could be treated as taxable income
Options Other Than Loan Settlement
Before resorting to settlement, try these alternatives:
- Loan Restructuring: Request your lender to increase the loan period or reduce the interest rate to ease EMIs
- Balance Transfer: Shift your loan to a different lender with lower interest rates
- Debt Consolidation: If you have multiple loans, get them consolidated into one loan at a lower rate of interest
- Seeking Professional Help: Financial and legal experts, such as Guardians Legal Solutions, can help negotiate more favorable terms with the lenders and take you to an intelligent debt settlement plan
How Guardians Legal Solutions Can Help
At Guardians Legal Solutions, we know how intimidating debt can feel. Our experienced team assists borrowers:
- Negotiate bank and financial institution loan settlements
- Seek legal solutions to lower their debt burden
- Defend their rights against aggressive recovery agents
- Become financially healthy once again after loan settlement
If you are having trouble paying back your loan, do not delay. Call Guardians Legal Solutions today to discuss the best debt solution for you.
Final Thoughts
Loan settlement may come to your rescue if you are facing difficulty in paying debts, but it has penalties. Take a well-balanced decision. If you are indecisive, consult financial and legal professionals to decide the right course of action.
Require loan settlement assistance? Guardians Legal Solutions is here to assist you. Let us join hands to secure your future finance.