06 May, 2025 | 11:01 IST
Personal loans could be helpful in meeting unplanned financial needs like medical emergencies or an urgent home repair. Availing a personal loan has also become convenient these days with the expansion of digital lending platforms. However, the important part is to repay the personal loan as per the pre-defined schedule. Missing the deadline to clear the debt could lead to several financial issues and affect the borrower’s credit score negatively.
At times many borrowers fail to pay off the loan as per the tenure due to some unforeseen circumstances. The non-payment may occur due to several situations like medical emergencies, business downturns, or job loss. It becomes challenging for the borrower to continue with the EMI payments in such situations.
The only option to cope with the high interest rate of a personal loan is to opt for a loan settlement. It helps the borrowers to negotiate with the lender and close the loan for a reduced amount. Let's understand how this process works and if there is any impact on your credit score.
Table of Contents
When a borrower is unable to pay back the entire amount due, they might work out a settlement with the lender to pay a lump sum payment that is less than the entire amount owed. The lender accepts this reduced amount and calls the debt "settled," which is not the same as "closed."
When a loan is "closed," it indicates that all principal and interest have been paid by the borrower. If a debt is "settled," it means the lender has accepted a loss on the loan, which also affects the borrower's credit score.
Although a loan settlement gives short-term relief to the borrower, it has a negative long-term impact. Loan settlement should only be considered when you have exhausted all other repayment options. For example, if you have lost your job, suffered a business loss, or have a medical emergency that leaves you financially drained.
Loan settlement can also be done if you have multiple loans and your EMI burden is too high.
Moneycontrol has partnered with eight lenders to provide you with quick, 100% digital loans up to Rs 50 lakhs. You can get the loan in three steps: enter your information, complete the KYC process, and set up an EMI term. Depending on your work status, interest rates can start as low as 10.5% per annum.
1. The first step is to assess your financial situation. Analyze your income, debts, and other expenses to determine your lump-sum settlement amount.
2. Contact the lender and inform them of your inability to continue due to financial hardship and request a loan settlement. Provide the necessary documents to show evidence.
3. Banks seek complete repayment; hence, they are hesitant to accept settlements. However, if they think it's the best option to get some of their money back, they might consent to a bank loan settlement.
4. Get written documentation as soon as the parties have reached a settlement agreement. The settlement amount, the due date for payment, and the impact on your credit record should all be made clear in this written agreement.
5. Pay the lump sum amount and make sure to retain proof of payment, such as a cancelled cheque, or a receipt.
6. Verify with your lender that the loan has been paid off and that the credit agencies have received the correct information after you have made the payment.
1. The credit agencies (Equifax, Experian, and CIBIL) report the loan as "Settled" rather than "Closed." This lets potential lenders know if you didn't pay back a prior loan in full.
2. A settled loan can reduce your credit score by 50-100 points or more.
3. It becomes difficult for a borrower to get future loans. You may be denied credit cards, personal loans, or home loans in the future.
4. Even if the loan is approved, the interest rate is higher due to the past settlement history.
You can explore personal loans up to Rs 50 lakhs from eight lenders on the Moneycontrol app and website. The fully digital application process ensures quick approval and disbursal. The application process is easy to follow: enter your details, complete the KYC verification, and choose an EMI plan. Interest rates start at as low as 10.5% per year.
Personal loan settlement is the last alternative for borrowers who are unable to repay their entire outstanding balance. It has long-term effects on credit scores and future loan eligibility, even while it offers short-term relief. Before choosing to settle, look into other repayment options, such as balance transfers or restructuring, if you are having trouble making your loan payments.
Share it in your circle
Table of Contents
Explore Top Lenders for Instant Loan upto
Get Instant Loan up to ₹50 Lakhs with Zero Paperwork from Top Lenders
100% Digital
Quick Disbursal
Low Interest Rates
