If you’re struggling to repay your personal loan, you’re not alone. Many borrowers face financial ups and downs that make EMIs hard to manage. The good news? There’s a way out — it’s called loan settlement.
But before you take that step, it’s important to understand what personal loan settlement actually means, how it works, and what impact it might have on your credit score. In this blog, we’ll walk you through the process step by step — in simple, human terms.
What Is Personal Loan Settlement?
Personal loan settlement is an agreement between you (the borrower) and the bank or lender to close the loan account by paying less than the total outstanding amount.
For example, if you owe ₹3 lakh and can’t continue paying EMIs due to job loss or medical emergencies, your lender may agree to settle the account for ₹1.8 lakh. Once you pay that amount, the loan is considered “settled.”
However, this is not the same as loan closure — settlement means you paid less than what you owed, and it can impact your credit history.
When Should You Consider Loan Settlement?
Loan settlement should always be your last option, not your first. Here are some genuine situations where it might make sense:
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Job loss or pay cuts making it impossible to pay EMIs.
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Medical emergencies or family crises that affect your income.
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Business losses leading to cash flow problems.
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Unforeseen events like accidents or natural disasters affecting financial stability.
Before choosing settlement, always try alternatives like restructuring, EMI moratorium, or partial payments.
Step-by-Step Process of Personal Loan Settlement
Let’s break down the settlement process in clear steps:
Step 1: Contact Your Lender
Reach out to your bank or loan provider. Explain your financial situation honestly. Banks are more open to settlement if you show genuine hardship and intent to resolve the issue.
Step 2: Submit a Hardship Letter
A hardship letter is a formal request explaining why you can’t continue with EMIs. Mention reasons like medical expenses, job loss, or any major life event. Be transparent — it helps your case.
Step 3: Negotiate the Settlement Amount
The lender will assess your case and offer a settlement figure. You can negotiate this — sometimes lenders accept 40–70% of the outstanding amount depending on your profile and payment history.
Step 4: Get the Settlement Offer in Writing
Once both parties agree, the bank will issue a settlement letter. Make sure it clearly mentions:
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Total amount to be paid
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Payment due date
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“Full and final settlement” clause
Never make payments without this document.
Step 5: Make the Payment
Pay the agreed amount as per the settlement letter. Always use a traceable payment method like bank transfer or cheque, and keep a record.
Step 6: Get a ‘No Dues Certificate’
After payment, request a No Dues Certificate (NDC) from the bank. This document proves the loan account has been settled officially.
Step 7: Check Your Credit Report
After 30–45 days, check your CIBIL report. The account status should appear as “Settled.” If it still shows “Active” or “Default,” raise a dispute with the credit bureau.
Impact of Loan Settlement on Credit Score
Here’s the catch — loan settlement affects your credit score negatively.
Since you didn’t repay the full amount, lenders see it as a credit risk.
Your credit report will show “Settled” instead of “Closed,” which can reduce your CIBIL score by 75–100 points or more. It can also make it harder to get loans or credit cards in the future.
However, it’s still better than letting your loan turn into a default or legal action.
Tips Before Going for Loan Settlement
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Negotiate wisely – Always try to reduce the settlement amount while maintaining professionalism.
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Get everything in writing – Never rely on verbal promises.
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Check credit impact – Be aware that settlement can affect future borrowing.
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Try alternatives first – Ask for EMI deferment or loan restructuring before opting for settlement.
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Plan your finances post-settlement – Build your credit again by maintaining timely payments on other accounts.
Final Thoughts
Loan settlement can be a lifeline when financial pressure feels overwhelming — but it’s not a free pass. It helps you breathe easy today but may cost you tomorrow in the form of a lower credit score.
If you’re considering loan settlement, take guidance from experts who can help you negotiate smartly and protect your financial future.
At Settlement on Loan, we help borrowers like you find the best settlement options, negotiate with lenders, and close debts in a smooth, transparent way.
