Tuesday, March 21, 2023

What is the loan settlement procedure in India?

One thing that you need to keep in mind whenever you are applying for a loan is how you are going to repay the loan. Hopefully, What is the loan settlement procedure in India? you shall manage to repay the loan as per your plans but just in case you are unable to repay the loan then it is better that you have some idea about the option of the loan settlement procedure.

Let us check the details of the loan settlement procedure:

  • Personal loan settlement is also known as personal loan defaulter settlement. What is the loan settlement procedure in India? This loan settlement process is an agreement that happens between the financial institution and the borrower and according to this agreement the loan is settled by repaying only part of the loan amount.
  • One must keep in mind that loan settlement is not one of the best options as there are several repercussions that the borrower has to bear. What is the loan settlement procedure in India?
  • Also read: What Can I Do With a Quantitative Finance Qualification?

Now let us see what is the loan settlement procedure?

  • The financial institution first checks the reason why the borrower has not been able to repay the loan in time.
  • In case the financial institution feels that the borrower has a genuine reason why he had not repaid the loan amount then he may give the defaulter 6 months grace period to repay the loan amount.
  • But this grace period is offered only if the borrower agrees to repay the entire loan amount in one go. The financial institution may write off certain loan amounts so that it becomes easier for the borrower to repay the loan amount.
  • Now how much amount may be reduced from the loan amount by the financial institution depends on the severity of the reason due to which the person was not able to repay the loan and the financial condition of the borrower.
  • The financial institution also takes into consideration the number of EMIs that have not been paid and may agree to waive off the processing fee or the penalty for the delay in the payment of the loan.
  • Once the loan settlement procedure is complete then the financial institution marks this loan as a settled loan.

Is it advisable to choose the loan settlement procedure?

Overall loan settlement procedure may look like a simple way out in case one is not able to repay the loan. But ideally, the borrower must never choose this option as it can harm the borrower. Therefore it is better to explore some other options just in case the borrower is not able to repay the loan.

  • If you have any assets like fixed deposits etc then you must try to liquidate these assets and repay the loan.
  • The borrower can try to speak to the financial institution and try to convince them to increase the loan repayment tenure and the borrower must ensure that he repays the loan within this extended tenure.
  • In case the borrower is having a load of multiple loans then the borrower must try to consolidate into a low-interest debt consolidation loan.
  • The borrower can also explore the option of a secured loan and he can take this loan against some assets that he has and he can repay the outstanding loan amount.
  • Everyone must always have an emergency fund that they can use in case of such emergencies. This emergency fund can help one get rid of the loan at the earliest.
  • Only if you have no other option to repay the loan then you must choose the loan settlement procedure.

Do you know how  settlement procedures can affect your credit score?

  • Choosing the option of a loan settlement procedure can negatively affect your credit score.
  • The loan settlement procedure harms your credit history and as a result, your credit score gets hit and this may make it next to impossible for the borrower to get a loan in the future.
  • Even if for a genuine reason you choose the loan settlement procedure even then the amount that you are paying is less and this reflects poorly on your creditworthiness.
  • Even though the loan is closed keep in mind that the lender marks the loan as settled and not as paid and this harms your credit score.
  • Keep in mind that by choosing the option of loan settlement process the loan may get closed but the name of the borrower may appear in the defaulter list which is not a good thing.

Are you aware of the difference between loan settlement and loan closure?

  • Loan closure means that the borrower has repaid the complete loan amount within the stipulated time and this has a positive impact on the credit score.
  • Loan settlement means the borrower was unable to repay the loan amount and the lender forgives a part of the loan amount so that the borrower can repay the rest of the loan and this can have a negative impact on the credit score of the borrower.

Important things to remember before you apply for the loan:

  • Check if you really need to take the loan and if this is the only way out then check whether you can repay the loan within the stipulated time.
  • Always make sure that you pay the monthly EMI on time and do not take multiple loans at one time
  • Ensure that you build savings and have emergency funds so that in case you have taken the loan and are unable to repay the same then you can use your savings to repay the same.
  • In case you have just opted for the loan settlement procedure then wait for some time before you apply for a new loan.

Related Articles: 11 Smart Ways to Improve CIBIL Score After Settlement


The loan settlement procedure should be the last option that the borrower must choose in case he is not able to repay the loan amount in time. Keep in mind that by choosing the option of loan settlement you are putting your creditworthiness at stake.

For more information about personal loans and related aspects, you can get in touch with Money View.

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