Loan Settlement
What is Loan Settlement
A personal loan settlement is commonly a negotiated agreement between the borrower and the lending institution to resolve the outstanding loan balance through a substantial one-time payment. To illustrate this, consider the scenario where an individual has availed a personal loan of AED 100,000 from a bank. Faced with challenges in meeting the regular instalments, the borrower proposes a lump sum payment of AED 50,000 to settle the debt. Upon negotiation, the bank may agree to close the personal loan account at the mutually decided amount, leaving a remaining debt of AED 50,000.
While it may raise questions as to why a bank would settle for an amount less than the total loan, the rationale lies in mitigating the risk associated with non-repayment. From the lender's perspective, reaching a settlement minimizes the risk, and they receive a substantial portion of the outstanding amount in a single transaction. Typically, lenders strive to recover the entire loan amount, and personal loan settlement is considered a final option. Should a borrower find themselves in a challenging situation, it is advisable to proactively engage with the bank to explore the possibility of settling a personal loan.
Downsides of Personal Loan Settlement
While personal loan settlement might seem like a viable solution when faced with limited options, it entails several drawbacks. When pursuing a settlement negotiation, it's crucial to be aware that a substantial upfront amount is typically required. Furthermore, opting for a settlement significantly impacts your credit score.
Although settling a loan can result in reducing your debt burden by 50-70%, the adverse effect on your credit score poses challenges in obtaining future personal loans. The enduring consequences may include the permanent closure of the loan account by your existing bank due to a tarnished credit history, potentially leading to a termination of your client relationship with the bank. While alternative issuers might still provide personal loans despite a low credit score, the trade-off often involves higher repayment rates, adding to the complexities of the situation.