If you have taken some kind of a loan for a period of time but are not able to pay it back, you can get in touch with your bank and tell them about it. Banks usually offer a one-time settlement to borrowers in such cases. This option is offered only after a borrower has defaulted on the EMI payment for three straight months. Furthermore, you must have a good reason for the defaults in order to be considered for a one-time loan settlement.
This option is typically offered to borrowers who face financial trouble due to reasons like loss of employment and income, losses in business, and health problems. Also, although this form of settlement sounds advantageous, it can put a significant dent in your CIBIL score.
How Does A One-Time Settlement Work?
If you go for a one-time loan settlement, you will be required to pay a portion of the total amount due, given that you are not able to clear the entire amount. Moreover, if there is a dispute between you and the lender, loan settlement can also be done in this case. It is noteworthy that settlement amounts are negotiable, but generally, they are either more than or equal to the principal amount. Once you and the lender come to an agreement regarding the amount and you pay it off in its entirety, the lender will report a loss on the total loan in the books by writing off the difference.
After the one-time settlement is complete, the relationship between the bank and the borrower is terminated. If the borrower ends up paying the complete amount of the settlement in one go, the lender will close the accounts in its books immediately. That said, the bank will record the losses and the waived amount and upload the names of the borrowers in their backlist.
Is A One-Time Loan Settlement A Good Idea?
While one-time loan settlements provide borrowers with immediate respite from their financial difficulties, it is not always the best option as it impacts your credit score significantly. This means that you will face problems in getting a loan in the future. On the one hand, it can minimize your financial burden, while on the other, it can impact your future credit considerably. Lenders are obligated to report the settlement to the credit bureau after the paperwork is done. This is when your account status is regarded as “settled,” meaning that you have paid off your loan only partially. This damages your credit score, and there is all likelihood of your future loan applications getting rejected.
If you find yourself in a financial quagmire and are unable to repay your loan, you can choose the one-time settlement by informing your bank of the same. However, if at any time your financial position is better, you can talk to your lender and come to some kind of an agreement to repay your loan amount, including the penalties and interest. After that, your bank will issue you a no-dues certificate.
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