Personal Loan Settlement: Everything you need to know before making a decision | Mint

People always resort to debt settlement when they are under pressure and want to break free from the vicious cycle of personal debt. It goes without saying that there is a certain Wrath that follows so it is important to be fully informed about the process and consequences beforehand. Here we will outline the advantages, disadvantages, and procedures in the debt settlement process.

What are personal loans?

A personal loan is an unsecured loan offered by any bank or financial institution where a certain sum can be loaned out. The key characteristic of most personal loans is that they are not backed by assets, whereas the majority of secured loans are backed by pledge of assets. Primarily, your basic income, work details, and credit record decide your eligibility along with the rate of interest you will get on the loan.

What is personal loan settlement?

A loan settlement is an agreement where your lender agrees to close your loan account after you pay them an amount that is less than the total amount owed. Whenever debtors find themselves in dire straits financially and fail to meet the payment deadlines, this option is usually considered.

Drawbacks of personal loan settlement

• Effect on credit score: The most immediate and irreversible effect of taking a loan settlement is a low average credit score which leads to more difficult access to new credit cards and loans in the future.
• Unfavourable credit history: The effect of a settled loan remains in the credit report and hence lenders see one as a high risk to lend money to.
• Limited credit access: Even after you have paid up a loan, lenders may deny you other loans or approve them at a cost which is abnormally high.

How does loan settlement work?

The first step of the loan settlement process is negotiating repayment arrangements with your lender. Here is a general overview of the procedure, although the specifics may vary depending on the lender:

In conclusion, for debtors with severe financial problems and are not capable of fulfilling their commitments, loan settlement is a solution. However, this is long-term, particularly when it comes to your credit score and ability to get credit later. Make the best decision for your situation by weighing out the pros and cons and consulting a financial expert if necessary.

(Note: Raising a personal loan comes with its own risks. So, due caution is advised)