ALL YOU NEED TO KNOW ABOUT PERSONAL LOAN SETTLEMENT
WHAT IS A PERSONAL LOAN
A personal loan is an amount that can be borrowed for a variety of uses such as house renovation, debt consolidation, emergency expenses such as medical emergencies, wedding expenses, vacation expenses, etc. It is used to cover personal expenses and is offered by a variety of institutions such as banks, lenders, or credit lending companies. The amount borrowed can be repaid in monthly installments or EMIs. Depending on the loan taken, interest rates, terms, and repayment procedure varies.
There are two types of personal loans: Secured and Unsecured. If you have taken a secured personal loan then you need to give some type of collateral to borrow the loan such as physical assets, savings account, money market or certificate of deposit (CD) accounts, investments in bonds or stocks, jewelry, etc. In case you are not able to repay the loan the lender can take the collateral to make up for the loss due to the lender’s inability to pay. In case you have taken an unsecured personal loan then there is no need for collateral to avail of the loan. However unsecured personal loans can come with higher interest rates due to the risk involved without any collateral. Most of the personal loans are unsecured.
PERSONAL LAON SETTLEMENT
Personal loan settlement is an agreement where the borrower pays an amount to the lender which is usually less than the outstanding amount as final settlement. The lender forgives a portion of the loan depending on the genuineness of the inability of the borrower to repay the loan such as medical emergency expenses, job loss, or some other unexpected expenses.
Depending on the severity of the reason the lender can also write off a portion of the principal amount, penalty, or processing fees and reduce the interest rates.
PROCESS OF PERSONAL LOAN SETTLEMENT
If a borrower finds himself in a position where he is unable to repay the loan due to a financial crisis that may have arisen due to medical emergencies, job loss, or unexpected he should first communicate it to the lender. It’s important to get hold of all the documents and evidence that will serve as proof of the borrower’s incapacity to repay the loan. After that, during the negotiating process, both parties try to come to a mutual amount that is agreeable to the lender and affordable for the borrower to settle the loan on. Professionals can also be hired in case the loan settlement is very complex. After the borrower repays the agreed amount, the lender marks the loan as “settled”.
BENEFITS OF A PERSONAL LOAN SETTLEMENT
1. HELPS TO ACHIEVE FINANCIAL STABILITY
Personal loan settlement allows you to be debt-free faster and with this, you can use your funds in other areas such as emergency funds, retirement plans, or some investment plan. After the settlement process, the borrower can focus on financial recovery and can achieve financial stability.
2. HELP YOU SAVE MONEY
When you pay less than the amount borrowed for the settlement of the loan, you are saving money. During times of financial crisis, it can be difficult to repay the whole amount borrowed. With personal loan settlement can you negotiate the settlement amount according to your repaying capacity.
3. HELPS TO AVOID DEFAULT
Defaulting on a loan can come with serious consequences such as legal action, confiscation of assets, decline in credit score, etc. It also harms the reputation of the borrower in society and he may face difficulties in availing credit in the future. However, by resorting to loan settlement, the borrower can prevent all these negative consequences.
4. INSTANT RELIEF FROM DEBT
By personal loan settlement, the borrower can clear his obligation to repay the loan by repaying less than the amount borrowed. This reduces stress and anxiety and provides instant relief from debt.
5. IMPACTS OF A PERSONAL LOAN SETTLEMENT
Personal loan settlement can help the borrower out of his financial crisis but it comes with a lot of negative consequences. Firstly, it negatively impacts your credit score. When you pay less than the amount borrower it shows a lack of creditworthiness. After the settlement process, the lender reports it to the credit bureau, and the loan is marked as “settled” rather than “closed”. This significantly brings down the credit score of the borrower. As most personal loans are unsecured, it means that the lenders assess the risk involved and the repaying capacity of the borrower through the credit score. The higher the credit score the better chances of getting approved for loans with better terms and lower interest rates. But if the credit score is less the borrower will face difficulties in getting loans in the future.
Loan settlement also harms in the long run by limiting the financial opportunities in the future.
6. HOW TO NEGOTIATE PERSONAL LOAN SETTLEMENT
One of the most difficult parts of the loan settlement process is the negotiations. But with proper planning and approach, both parties can come to an agreement that is suitable for both.
Firstly, the borrower should understand his financial situation by assessing his income, savings, assets, and repayment capacity.
Second, the borrower should compile all the necessary information related to the loan like the outstanding amount, interest rates, and terms of the loan. The borrower should also have proof of his inability to repay the loan to serve as evidence to the lender.
After this, the borrower should contact the lender, providing all the necessary documents, and make the lender understand his situation.
The borrower should ask for a settlement amount that is reasonable and realistic. If the settlement amount is too low the chances are there that the lender may not agree to that amount. The borrower needs to show his willingness to settle the loan by cooperating in the settlement process.
CONCLUSION
Personal loans are taken to cover personal expenses such as house renovation, debt consolidation, emergency expenses such as medical emergencies, wedding expenses, vacation expenses, etc. Personal loans are mostly unsecured and no collateral is needed to avail the loan. A person may face difficulties in repaying the loan due to various reasons like financial emergencies, medical expenses, job loss, or unexpected expenses. This is when personal loan settlement comes to the rescue. Even though it negatively impacts the credit score which can affect future credit approvals. But as a last resort, it can greatly help the borrower to come out of his financial hardship.
This article is written by Purbasha Parui, a 1st-year law and finance enthusiast from BMS College of Law, Bangalore.
