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What is loan settlement?
How to Negotiate Personal loan Settlement :-Loan settlement refers to the process of completely repaying the loan in a lump sum amount that is less than the total outstanding amount. In this process, the borrower negotiates with the lender to accept a lesser amount as the full and final payment of the loan.
The lender may agree to a settlement amount to avoid the risk of nonpayment or to recover some of the money owed quicker. The borrower benefits from settlement by getting a discount on the total outstanding amount and avoiding the negative impact of default on the loan. However, settling the loan can have an impact on the borrower’s credit score and should be carefully considered before making a decision.
Let’s say you borrowed a personal loan of Rs 5,00,000, which you were supposed to pay back over five years with a 12% interest rate. You paid your EMIs regularly for the first three years, and you have paid a total of Rs 4,00,392 till now. However, due to financial difficulties, you are unable to pay the remaining outstanding balance of Rs 2,66,941 and can only afford to pay Rs 1,50,000. If the lender agrees to your proposal, your loan will be settled, and you will no longer owe any remaining balance.
How to negotiate a personal loan settlement?
Before starting debt settlement negotiations, it’s crucial to consider the following questions to ensure that it’s the right choice for your financial situation:-
- How much am I able to pay for debt settlement?
- Will I need to apply for a loan in the future, and how will a settlement affect my ability to be approved?
- What will be the cost of credit hit if I go through debt settlement?
The personal loan Steps involved the settlement process:-
A repayment plan:-Debt settlement usually requires a one-time payment, which can be challenging to arrange when you are already struggling financially. However, you may be able to make the payment using funds from a recently matured investment or an office bonus, if you have access to either of these.
know your debt:- Before contacting your lender for debt settlement, it’s important to do some calculations. You should figure out how much you have already paid toward your debt and how much you still owe. You can use an amortization table to break down the interest and outstanding principal. Based on your financial situation, determine how much you can realistically afford to repay. If your settlement offer covers a significant portion of the outstanding principal, your lender may be more willing to close your account and accept the settlement.
Contact your lender:- Debt settlement usually requires a one-time payment, which can be challenging to arrange when you are already struggling financially. However, you may be able to make the payment using funds from a recently matured investment or an office bonus, if you have access to either of these.
Make a Formal agreement:- Debt settlement usually requires a one-time payment, which can be challenging to arrange when you are already struggling financially. However, you may be able to make the payment using funds from a recently matured investment or an office bonus, if you have access to either of these.
Check your credit score:- After Settling the loan, it’s important to check whether the lender has sent a loan closure report to the credit bureaus. Sometimes, lenders may neglect to do so, which can have a significant impact on your credit score. To ensure that the settlement has been properly reported, visit the official website of the credit bureau and obtain an updated credit report. Check whether the settlement has been reported accurately and verify that the settlement amount matches the amount agreed upon with the lender when you signed the contract. If you notice any discrepancies, upload a copy of the NOC and any other supporting documents to address the issue.
Clear your settlement payment:- After completing the necessary steps for loan settlement, it’s time to make the payment. It’s important to avoid paying in cash and instead opt for cheque payments, as this will help you keep track of your payments and avoid any discrepancies in the future. Make sure to use a cheque for the settlement amount and obtain a receipt for your records.
Advantages of loan settlement:-
Loan settlement can offer several advantages, such as reducing your financial burden and allowing you to clear your debt faster than if you continued making regular payments. Additionally, settling your loan can prevent your debt from accumulating further interest and fees, which can save you money in the long run. Once the settlement is complete, you can focus on improving your credit score and rebuilding your finances without the burden of outstanding debt.
- Use your liquid assets, such as fixed deposits, mutual funds, or stock investments, to repay your outstanding personal loan. This can help you clear your debt quickly and avoid accumulating further interest and fees.
- Consider a balance transfer if the higher interest rate on your loan is making it difficult to manage your debt. Look for other lenders in the market who are offering low-interest loans and transfer your balance to them.
- Request your lender to extend your repayment period. This can substantially reduce your EMI amount, making it easier for you to make payments.
- Instead of settling on a single loan, consider obtaining a low-interest personal loan to consolidate all of your debts and repay them all at once.
- Set aside a portion of your savings every month to maintain an emergency reserve. This can come in handy during financial crises and help you avoid taking on more debt.