Well, a personal loan is the boon when the financial crises come looking for emergency expenses due to medical emergencies, education, wedding, and even home improvement. Though paying back the personal loan over time with interest becomes at times a big burden. At that juncture, a one-time settlement of personal loan can prove relief-giving. So, go through this article and know everything about one-time settlements for the personal loan.
What is One Time Settlement, Personal Loan?
A one-time settlement, or OTS, of a personal loan is an agreement whereby the borrower agrees to pay a lump sum amount to settle the outstanding loan in full. Upon its conclusion, the lender considers the loan settled even though it may have paid less than what had been loaned.
It is noteworthy that one-time settlement is offered to the borrowees only when the borrowers are not able to pay their monthly EMIs and have already defaulted to pay the loan amount. The lender may offer the one-time settlement facility in order not to incur a full loss and recover at least part of the loan amount.
How does Personal Loan One-Time Settlement Work?
Generally, this is how personal loan one-time settlement works:
Negotiation with the Lender: In case of default in payments on a personal loan or at the time when repayments seem to become difficult, you can always negotiate with the lender for a one-time settlement. The lender may also offer such an option if he perceives that recovery is unlikely through normal EMIs.
Agree on a Settlement Amount: Depending on the lender's review of your repaying history and current financial condition, the lender will present a settlement amount. Of course, it is usually lower than the total amount outstanding as a loan, but it would allow the lender to recover a massive portion of the loan through this settlement process rather than resorting to a lawsuit.
Lump Sum Payment: After agreeing to the settlement amount, you will be required to pay a lump sum to the lender, and this would close the loan. Once the payment is made, the lender will mark it as "settled".
Even though the loan will be considered paid, it will be reported to the credit bureaus by the lender. Therefore, your credit report may reflect that this particular loan was settled for less than the outstanding amount. Which has a negative impact on the credit score of yours.
Benefits of Choosing a Personal Loan One-Time Settlement
While not ideal-by far, settling a loan provides some wonderful benefits to those with difficulties in managing their finances. Here are some of the most important benefits it provides:
- Instant Relief from Debt
The one-time settlement lets you just get rid of the outstanding loan burden in one go. This can be a huge relief for the several borrowers who are not even in a position to regularly pay their EMIs and are in a pretty difficult situation because the lender agrees to close the loan once the lump sum amount is received. After making the settlement, you don't have to bother about the increasing interest or subsequent EMI payments.
- Avert Legal Action
In case you have a history of defaulted loan repayments, the lenders might initiate legal actions to recover the dues. With a one-time settlement, you avoid such regulatory consequences because the lender will finally close the account after receiving the settlement amount.
- Lower Repayment Amount
Actually, among many major attractive benefits of a single lump-sum payment, you also end up paying less than the total outstanding loan amount, ranging from 25% to 75% of what you actually owe, depending on your financial situation and the lender's willingness to settle.
- Peace of Mind
Be financial-related mental stress simply because you cannot pay back debt. On the single settlement of the loan account, you can settle it once and for all, thus giving an element of peace of mind and enabling you to regain your stability concerning your finances.
Disadvantages of Personal Loan One-Time Settlement:
Of course, although it would definitely be an attractive one-time settlement, there are some downsides to it that you need to think about before you make your decision:
- Credit Score Impact
The major disadvantage associated with choosing for a one-time settlement for personal loans is an adverse effect on your credit score. When a loan is termed as "settled" rather than "closed" or "paid in full," it means to the lending future that you were unable to pay back the full amount. This can also cause a significant reduction in the credit score, which means you will not get loans or credit cards easily.
- Complications in Further Loan Access
Settlement of loans adversely impacts the credit record, hence your ability to access loans in the short term will be affected tremendously. Most of the time, loan lenders perceive a settled loan as an indicator of unstable financial conditions, hence they will not want to approve new applications for loans. Even though you will manage to access a loan, its interest rates will increase, coupled with stringent terms.
Amount waived off by the lender in the course of settlement may be considered income and would impact your taxes. You should consult a financial advisor or tax consultant for guidance as to how the settlement may impact your taxes.
- Pressure on Financial Resources
While a one-time settlement decreases the amount you owe in totality, you will always have to pay out a lump sum. This will sometimes force you to borrow elsewhere, which is likely to give you more financial headaches in the long term.
Steps Before Choosing an One-Time Settlement via Personal Loan
If you are thinking of settling once and for all your personal loan, follow these steps for its appropriateness to your case:
- Know Your Current Financial Condition
First, before you go to the lender, take an inventory of your finances. Can you afford a one-time lump-sum payment to pay up the amount with your lender? If you can, then there is little hope. But if not, then perhaps you will have hope through the restructuring or refinancing of your loan, where it may be possible to repay the loan easier, in much smaller installments.
- Negotiation with Your Lender
You will also be informed whether or not it will be a one-time settlement; the reality is that a one-time settlement is always a negotiated process, so do not hesitate to negotiate different settlement amounts with your lender. The more transparent you are about your financial difficulties, the better chances you will have of getting a favorable settlement amount.
- Consider the Long-Term Consequences
Consider carefully, before making an off-the-cuff decision of making a one-time settlement, the long-term implications on your credit score and future access to loans. If you are ever likely to require loans in the future, think carefully about the balance between settlement and long-term advantages.
- Pursue Options:
Things to do before settlement: Before finalizing the settlement, there might be several alternatives like restructured loans, EMIs on holiday, or even taking a loan from some other place and clearing the outstanding balance.
And sometimes, lenders might be willing to change terms of the loan to ensure the burden of repayment is sustainable and not to settle the amount.
Conclusion
Actually, a one-time settlement for a personal loan may give time-bound relief to the borrower. Still, it is crucial to know about the advantages and disadvantages of this particular method of debt relief. It immediately gives debt relief and saves a borrower from certain legal actions, but it eventually hits your credit score severely and reduces your future borrowing facility.
It's good, then, that anyone seeking to put an end to forever will consider the financial situation multiple times, negotiate better with a lender, and explore all possible alternatives. Platforms like Loan Free provide expert guidance and support, helping you make the best decisions for your financial future.