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If you’ve taken a loan for a certain tenure but are unable to repay it, you can approach your bank and inform them about it. In such cases, banks tend to offer something known as a ‘one-time settlement’ (OTS). This option will be offered to you only after you have gone three straight months without paying your EMIs. Moreover, there has to be a good reason for you to default on your payments.
Banks generally offer the option of one-time loan settlements to those who face financial difficulties for various reasons such as loss of income and employment, health problems, or losses in business. Although one-time settlements sound like a beneficial option, they can significantly impact your CIBIL score.
How do one-time loan settlements work?
If you opt for a one-time loan settlement, you will have to pay a part of the overall amount due considering the fact that you’re unable to clear the whole amount. Loan settlements are also done in case there are disputes between lenders and borrowers. The settlement amount is negotiable with the lender, but more often than not, it is either equal to or exceeds the principal amount. Once you agree upon an amount with your lender and pay it off, your lender will write off the difference and report a loss on the loan in its books.
Following a one-time settlement, the relationship between a borrower and the bank is terminated. In case the borrower pays the whole settlement amount in one go, the bank will close the loan account on its books immediately. However, banks record the waived amount and losses and also tend to upload the names of such customers in their blacklist.
So, is a one-time loan settlement a good option for you?
While a one-time loan settlement can offer immediate respite from short-term financial difficulties, it can also pose a major problem for any credit you may seek in the future. A one-time loan settlement will significantly reduce your financial burden for the foreseeable future. However, once the paperwork is done, the settlement will be reported by your lender to the credit bureau, and your account status will be ‘settled’. This essentially means that you have only partly repaid your loan, which is sufficient to damage your credit score. In case you apply for another loan or credit card in the future, there’s a good chance your application will be rejected.
What's your alternative?
A one-time loan settlement may come in handy as a last resort, but there are plenty of things you can do to repay your loan in full. Here are some of the most common options you can consider:
• Ask your lender for more time: Lenders understand that you don’t want any black marks on your credit report, and may be willing to offer you some more time to repay the loan in full rather than make a one-time settlement.
• Liquidate your assets: While the idea of paying less than you owe can give you something to think about, you could consider liquidating some of your assets and investments and clear off the loan for good.
• Ask your lender to restructure the loan: You could also ask your lender to restructure the terms and conditions of the loan to make it easier for you to repay it completely.
• Interest-free loans from relatives: One of the easiest ways to repay your loan is by taking a loan from your family at zero interest and use the amount to repay your bank.
• Increase your avenues of income: If you cannot repay your loans from the aforementioned options, you can always increase your sources of income. There are plenty of ways to make money both online as well as offline on a freelance basis.
What if the alternatives don't work out?
If you can’t find the right means to repay your loan and you end up opting for the one-time loan settlement, you can still convert a ‘settled’ account to a ‘closed’ account at a later date. Once your financial position gets better, you can get in touch with your lender and request to repay your dues, including the interest and penalties. Once you clear your dues in full, ask your bank for a no-dues certificate. Your account will then be reported as ‘closed’ to credit bureaus and will be reflected on your credit report. You can then take the necessary measures to improve your credit score to gain easier accessibility to credit in the future.
In conclusion, while a one-time settlement might appear as a feasible option in the short-term, it does have long-term implications. The best strategy is to think it through before applying for any loan, compare the products for the best repayment terms, assess the affordability of its EMIs, and implement smart strategies to repay the loan in full in time.
Adhil Shetty is a guest contributor. Views expressed are personal.
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