The term ‘loan settlement’ is defined as a situation where you have borrowed a loan from a lender and you might not be in a position to clear the dues owing to several factors like an extreme medical condition or job loss. In such circumstances, a borrower should reveal the present crisis with the lender and request them to provide some time to repay the loan amount.

The concerned lender might offer a one-time settlement option that allows you to take a breathing gap and pay at a later stage. 

Now we shall discuss how does a lender process this loan settlement procedure:–

The loan settlement procedure implies negotiating with the creditors and somehow convinces them to bring down the debt while accepting a huge amount.

• Reducing the overall debt is based on the intensity of the situation along with the financial capacity of the borrower.
• The status of the loan will be deemed as ‘settled’ since the agreement is for a lower amount than against the actual dues. On the contrary, if the borrower has paid the entire outstanding amount, the status of the loan will be marked as ‘closed’.
• Loan settlement procedure is usually followed in the case of unsecured loans wherein borrowers are not required to attach assets in the form of collateral security. This is not applicable in the case of secured loans like property, gold loans, and vehicle loans. Negotiating to reduce the debt amount on the products kept as security is a complicated task.
• There is only a 50-50 chance of winning for both creditor and debtor. Out of which the debtor will receive immunity from appearing for court trials and tribunals. Apart from that, they need to pay a smaller amount than what he availed. Whereas the creditor has the option to redeem whatever amount, the debtor is willing to pay instead of filing bankruptcy and it could hamper the possibilities of recovering some portion of money given to the borrower.
• If you have decided to choose a debt settlement, the next step is to decide whether to hire a professional or not for executing the loan settlement procedure.
• You should be aware of the fact that a Debt Settlement Company will be charging extra fees to carry out the loan settlement process. You could save a considerable amount of money by being a better negotiator rather than depending on a debt settlement company.
• It is up to the borrowers to convince the creditor that you are in the middle of financial constraints. For instance, if you are planning for a settlement with a credit card company, you have to make sure that you narrow down the expenses on the credit card for six months.
• For those individuals who are looking forward to a loan settlement, it is essential to prioritize the bills to be paid such as food, monthly rent, etc…
• Borrowers have to make sure that they convey the message to the creditor clearly that you are able to manage funds and prefer to clear dues before funds are drained.
• You have to ensure that you have adequate funds to carry out the loan settlement failing which settlement and negotiation will be a disaster in case of default payments.

Impact of loan settlement on the credit score of a borrower

• Once a lender has decided to write off a loan, they would immediately inform CIBIL and similar credit rating agencies.
• Even though the transaction of loan has ended, it is not considered a standard closure. As a result, credit rating agencies will mark the transaction as ‘settled’ thereby making other financial institutions view it as a negative credit behavior.
• This would have a dramatic impact on the credit score of a borrower. The credit rating agencies keep this piece of information for about seven years. During this period, if the borrower wishes to apply for another loan, the concerned lenders might be reluctant to deliver the loan amount due to the poor repayment ability of a borrower.
• The possibility of rejecting the loan application is high.

Things to remember

• Borrowers have to keep in mind that they should apply for a loan that fits within their repaying capacity. It is suggested to avoid being greedy and borrow more money since it might be complicated in repaying those.
• A major reason why lenders choose a one-time settlement option is that the lender is sure that you are unable to repay the loan amount. They prefer to end the transaction deal with whatever amount you are able to pay.
• However, the credit score of a borrower will be affected thereby preventing them from availing of a loan in the future. 

Final Words:

Money View is a leading financial institution from where you can get a loan at a low rate of interest. If due to a financial crisis, you will not be able to clear the dues or repay the amount of loan within a considered period, you can ask for loan settlement.