Personal loan settlement: What you need to know before you make a decision

Debt settlement is what personal loan settlement really is and why it should be your last choice.

If you are struggling to repay your personal loan, your lender can make it possible for you to make a one-time settlement. This allows you to close the deal for less and settle the loan but at a cost. Even though it may ease immediate money concerns, paying a loan can ruin your credit report and borrowing facility in the future. Debt settlement is what personal loan settlement really is and why it should be your last choice.

What is settlement of personal loan?

Loan settlement is when the bank consents to accept a part of the outstanding balance as payment in full. It usually happens if the borrower is experiencing genuine hardship—like loss of job or health emergencies—and cannot go on making payments. As the bank waives off the amount due, it's not reported as a "closure" on your credit report—it is marked as "settled," which can harm your credit score.

How settlement affects your credit score

When you settle a loan, your credit report reflects it for up to seven years as a "settled account." This is not good in the eyes of lenders, since they are aware that you did not pay the whole thing. Your credit score will drop by 75 to 100 points or even more, depending on the rest of your record. You can be charged more interest or simply denied when you try to apply for future loans or credit cards.

When to choose settlement?

Loan settlement should be considered only if other options—like restructuring, deferment, or top-up loans—are exhausted. If you simply cannot repay and your lender refuses to reschedule payment, settlement is a possibility. Make sure you get the agreement of settlement in writing and hold all payment evidences safely.

Will you be qualified to take another loan once you pay off one?

Settlement is considered by lenders to be a sign of credit risk. Even though you can probably get loans in the future, they will likely be at higher interest rates, lesser amounts, or tougher terms. Other lenders may deny your application. You can restore your credit in time by taking care of credit cards, paying all bills on time, and not applying for too much credit at a single instance.

How to settle free of cost

Before opting for settlement, request your bank if you could restructure the loan, enhance the term, or repay in smaller EMIs. If you have already missed payments, attempt to clear the past-due amount and restore the account to "standard" status. Few lenders also provide temporary assistance under hardship plans. All these solutions don't hit your credit score as hard as settlement.

FAQs

1. Is settlement synonymous with closing a loan?

No. Closure involves full repayment, while settlement involves payment in part under extraordinary conditions. Closure is good for your credit, but settlement is bad for it.

2. How much can I save by way of settlement?

Lenders may waive penalties and partial principal, but the amount varies with your negotiating skills and financial standing.

3. Can I improve my credit score after settling a loan?

Yes, but it takes time. You’ll need to maintain disciplined repayments on all future credit accounts and reduce your credit usage ratio.