Personal loan

You may have taken a loan with a certain plan of repaying it on time, but life has thrown you a curveball and you are now struggling to repay it. Or you have a mounting credit card outstanding, and you find it difficult to pay it due to some unavoidable circumstances such as medical emergencies or job loss. At times like these, should you go for a one-time loan settlement with your bank? There is no straight answer. However, if you have to opt for a one-time loan settlement option, you should know how it works and how it will impact your credit score or profile.

Loan-settlement: Which loan should you settle?

A borrower owes not only the principal but also the accrued interest and any incidental charges levied by the lender. Paying dues on time is the primary obligation of the borrower and the lender has the right to recover the entire amount. However, in case of exceptional circumstances, a borrower can request the lender for a one-time loan settlement that will allow the borrower to repay a lower amount than what is owed to the lender. But it has some serious consequences for the borrower’s ability to access credit later.

You can settle any type of loans — personal, auto, home, education, business or credit card debt. But it is of utmost importance to remain cautious of certain points while taking a decision on settling your loan as it will have a significant impact on your credit score and financial future, says Gaurav Jalan, CEO & Founder of instant loan platform mPokket.

Loan settlement should be a last resort. If you exhaust all avenues to pay your monthly loan instalments, only then should you contemplate settling the loan. “You should consider loan settlement if you are unable to make your monthly payments and are at risk of defaulting on the loan,” says Atul Monga, CEO and Co-Founder of Basic Home Loan. It will help you avoid legal action or bankruptcy for defaulting on loan payments.

Now, what types of loans should be settled? Raj Khosla, Founder and MD, of MyMoneyMantra.com, says, “Loan -settlement should primarily be done for unsecured loans such as personal loans, a loan against credit card and business loans. You should avoid settling secure loans such as home loans, auto loans, or loans against property, securities or gold as lenders can take possession of your assets that are mortgaged for taking the loan.”

Loan -settlement: How to decide the amount you need to settle
When you take a loan, you are obliged to repay it on time. Due to financial hardship, if you cannot repay it, you can opt for a one-settlement option. If you are wondering how much you have to pay, read on.

It is important to remember there is no fixed rule to go by while settling your loan. It will entirely depend on how you negotiate and the policies of the lender.

Based on your circumstances and financial condition, lenders may also accept partial payment. However, it is generally better to settle the loan in full if you can afford it, as this may have a lower impact on your credit score, explains Raoul Kapoor, Co-chief Executive Officer of Andromeda Sales and Distribution, a loan distributor.

“The amount you should offer to pay to settle your loan will depend on a number of factors, including the outstanding balance, the interest rate, and your ability to negotiate,” says Monga. “In general, you usually offer to pay more than the outstanding balance, but less than the total amount of interest that you would have to pay if you continued to make the monthly payments.”

For a loan settlement, lenders generally accept a lump-sum payment that is less than the total outstanding amount. If you are facing extreme crisis where arranging repayment money is very difficult then you may need to prepare for hard negotiations. While you may have to finally settle to pay a higher amount but you should start with an offer to pay a lower amount. You can start your negotiation with a proposal of paying 25 per cent or 30 per cent of the outstanding balance and explain your difficulties in detail. The specific percentage can vary widely but it can be around 30-50 per cent of the outstanding amount, mentions Ravi Kishore Goyal, Vice President, Strategy, Propelld, an education loan distributor.

However, when the outstanding amount is too big and your repayment capacity is very low, you may need to request for a much lower settlement amount. Khoshla says, “You should aim for anything between 10 and 50 per cent of the loan in the case the total outstanding amount is way higher than your yearly income. On the contrary, lenders always try to settle a loan for amounts higher than 50 per cent of the total outstanding. You have to make sure that the loan settlement amount remains as low as possible,” he adds.

If you have an old loan with a high chance of default, the loan settlement amount can go up to 50-70 per cent, says Harish Parmar, Founder, SingleDebt, a debt resolution company. However, you should consider it only if you are completely broke and do not expect a turnaround in your financials anytime in the next couple of years, says Khosla.

The settlement may happen in two forms depending upon your repayment comfort. Either you can go for one time settlement and pay the entire settlement amount at one go or you can ask the lender for structured settlement where you can pay the settlement amount in parts within a given timeline.

Should you go to a debt counselor or debt-settling agency to settle your loan?
Debt counsellors or debt settlement companies can help you to negotiate with your lender and develop a debt repayment plan. Debt settlement companies can also negotiate on your behalf and get you a lower settlement amount.

You should consider going to a debt settlement agency if you don’t have adequate knowledge or aren’t sure of debt negotiation. “Opting for professional assistance comes with clear benefits. Debt settlement companies are experienced in negotiations, often secure better terms, and handle paperwork efficiently,” says Jalan.

However, it is important to note that debt settlement companies can charge high fees. So you should do adequate research before choosing one.

The cost of using a debt settlement company will vary depending on the company and the amount of debt you are settling. Some agencies might charge a flat fee or a percentage of the debt they help settle. “In general, you can expect to pay between 15 per cent and 25 per cent of the amount of debt you settle,” says Monga. “You should always cross-verify the credentials of a financial expert, or a person/entity acting as a debt financier. Imposters and fraudsters can dupe you by providing a false hope of loan settlement.”

How does loan settlement impact your credit score?
In the final step, you should understand what will be the impact on your credit score when you
go for settlement and the bank writes off a part of your loan?

When you settle a loan, it will be reported to the credit bureaus as a “settled” account or “settled for less than the full amount,” says Kapoor. This will show on your credit report. A settled-account entry can remain on your credit report for up to seven years, says Parmar of SingleDebt. As settling a loan reflects your inability to oblige the repayments in full, it will critically impact your credit score. Although the contractual relationship between the lender and the borrower is over, your credit history remains impacted..

Can you take a loan or credit card immediately after a loan settlement?
Borrowers who have opted for loan resettlement should try and rebuild their credit score before applying again for a loan or credit card, says Rohit Chhibbar, Business Head, Paisabazaar. “It’s recommended to wait at least a year or two before applying for a fresh loan but the exact timeframe may vary. It is advisable to work on improving your credit score by making timely payments on other obligations, reducing debt, and managing your finances responsibly,” says Kapoor.

Khosla suggests that borrowers who have gone for a loan settlement can try to get a secured credit card. This way they can access interest-free (usually with 30-50 days interest free credit period) credit and can partly recondition the credit score from the damage done due to the settled status on the credit report.

Remember it is your last resort, don’t opt for it casually
Experts reiterate that loan resettlement should be the last option as it will hit your creditworthiness or credit score drastically. “Instead of opting for loan settlement at the first instance, stressed borrowers should first check for a balance transfer or repayment moratorium. If not, then they should sell assets, redeem investments or try to avail of loans against them, if possible, to make loan repayments. They should also be open to seeking help from their family and friends. If none of these suffice, then they should contact their existing lenders for a one-time loan settlement,” says Chhibbar.

Should you settle your credit card dues?
“Settling a credit card loan of a few thousand rupees is not advisable at all as the repercussions of loan settlement in the longer run outnumber the potential short-term benefits of settling a loan now. You should never compromise with your credit score by opting for a loan settlement if the total loan outstanding is 20-30 per cent of your yearly net income,” Khosla adds.

( Originally published on Aug 24, 2023 )

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Mrin Agarwal , Founder Director, Finsafe , says you should ask yourself if you have made the right financial goals? Are the goals defined properly? For example, what happens is somebody has a goal and decides he needs about Rs 20 lakh for his child’s education based on today’s cost levels, but not taking into account inflation. With inflation, that amount 10 years down the line is going to be Rs 35 lakh. So they end up investing the wrong amount.

Let me give you a task to list down the things that one should do before they turn 40 in terms of their financial planning . Forty is a very crucial age where you are in the middle of a lot of things. You are in the middle of a lifestyle where you have reached a certain level. You have reached a certain stage in your professional life. So, 40 being a very crucial age, what all actually changes for you financially? What are the things one should go back and think about before they turn 40?
The first three are really checking the basics. The first thing that you need to check is do I have all my basics in place? The basics for financial life is going to be: right amount of emergency cash and right amount of life and health insurance because your family size might have increased, your circumstances might be different. Also, lifestyles change so much every four to five years. So, keeping in line with your lifestyle, do you have the right amount of emergency cash, life and health insurance?

A lot of people want to retire at 50. So if you are 35 today and you need to reach that number, you need to be doing some really serious planning, which means that you also need to be having some really serious savings. So the next question is are you saving at least 30 to 40% of your take home?

I do a lot of sessions. And generally, I see that the average savings number is about 20, 25%. And very, very few people are able to reach this 30-40% number. So that is what one really needs to check and make course correction accordingly.

The third thing that you need to also check is interlinked to the amount of savings that you are doing, to check where are you on loans, especially unsecured loans, because unsecure loans affect your credit score. Unsecured loans are really expensive. Remember, your income is not increasing even at the pace at which the interest rate that you are paying for a personal loan or a credit card loan. So obviously, you need to ensure that by the time you reach 40, the only loan that you probably have is the home loan. And you have really cleared off all of your other loans. I would say these are the first three fundamental things that you need to have in place before you turn 40.

How can one achieve this because you need to get your basics right, definitely but what if you have not reached there yet? Let us just talk about liabilities. The financial liabilities that should just be done with.
Hopefully, nobody will have an education loan by that age. But, you know, given the fact that that is the time you start a family. People do tend to take a lot of pay later or credit card loans for a vacation or personal loans, for marriage and all that. Clearly these are expensive loans and you need to draw up a plan. First of all, it really means you need to go on a complete spending detox. You need to try and save as much as possible so that you can look at repaying these particular loans. There is really no other way around it.

What about those people who plan an early retirement or maybe want to come up with something on their own or plan a second income when they are 40? This really needs a certain amount of thinking and introspection in terms of your life going ahead, your finances and the kind of financial responsibilities you have. How can one go about it?
The first thing is to have a financial planner in place. I do not really believe that it is one of the fundamental things that one needs to have, which is to have a financial plan written for yourself with the help of a financial planner. And because, on your own, a couple of things happen. So, here are the next few things that you really need to start thinking about.

Have you actually made the right financial goals? are the goals defined properly? Just to give you an example, what happens is that somebody has a goal and decides he needs about Rs 20 lakh for his child’s education based on today’s cost levels. But they do not take into account inflation. And with inflation, that amount 10 years down the line is actually going to be Rs 35 lakh. So they end up investing the wrong amount.

Point number four and five would be that you need to ensure that you have thought about your goals very clearly and taken inflation into account when you are saving for those goals. Now, coming to retirement, again, the earlier that you start saving for retirement, the better it is because the amount that you need to invest is going to be lower.

Let us take an example of a person who has an expense of Rs 1 lakh per month. Let us say this person is 35 and wants to retire at 60. Now, at the age of 35, this person needs to invest Rs 1 lakh. If we take into account inflation at 6% and return on investment, a simple 8%, which you will get in your EPF. But if you delay this investment by 10 years, if you do not start at 35 but start at 45 instead, then the amount that you have to invest is much higher. It is around Rs 1,65,000.

After getting these basics in place, you have to really focus on your financial goals to see that have you set your goals correctly? Have you taken inflation into account while investing for these goals? And of course, it goes without saying that you really need to start investing early. The next thing would then be to see where are you going to invest?

For example, the household savings data came out recently which showed that equity allocation that households have is still less than 10% which means that on a majority of investments that they are doing, if we exclude real estate, are not beating inflation. So one more thing is to go and check two things; one, is my portfolio actually beating inflation or not? And for that, what you need to do is that you put down each asset class in your portfolio with the estimate that you are getting and please take conservative estimates and the percentage allocation.

For example, if you have 10% allocation to equities and you have got 60% allocation to fixed deposits, maybe 20% in insurance schemes and 10% in the employee provident fund. Typically I see that for most people, 90% of financial assets will be in fixed return instruments and only 10% is going to be in equities. In this case, your return is working out to 6.4% which means it is not really beating inflation. One of the very important things to do early on is to ensure that wherever you are investing, the portfolio as a whole needs to be able to beat inflation and you need to have a good amount of allocation.

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Mumbai: The credit growth is likely to moderate to 13-13.5 per cent this fiscal but will improve slightly to 13.5-14 per cent next financial year as the economic pace picks up, according to a report. The biggest factor driving the moderation is low demand in wholesale credit, which constitutes as much as 60 per cent of the overall credit. Wholesale credit is seen slowing to 11-11.5 per cent this fiscal from a decadal high of 15 per cent in 2022-23, Crisil Ratings said in a report on Thursday.

A key monitorable, which will determine credit growth going forward, is the extent to which deposit growth picks up for banks, Crisil Ratings said.

The retail credit demand will continue to go up in this fiscal but corporate credit demand is lagging, which is likely to pick up in the next fiscal on capex revival, the report noted.

In absolute terms, overall bank credit stood at Rs 148 lakh crore in FY23, clipping at 15.9 per cent year-on-year, and this is likely to grow to Rs 168 lakh crore or 13-13.5 per cent this fiscal and further grow to Rs 191 lakh crore or 13.5-14 per cent in the next, it added.

According to the agency, the credit demand moderation this fiscal will be because of the following four key reasons — gross domestic product growth is expected to fall to 6 per cent this fiscal from 7.2 per cent last fiscal, which will impact the overall credit growth.

Secondly, the easing of inflation with some softening in commodity prices. A significant part of the growth in wholesale credit (comprising corporates and micro, small and medium enterprises) last fiscal was driven by higher working capital demand in a high-inflation environment. Going forward, inflation levels are expected to be lower than the last fiscal.

Thirdly, robust bond issuances in the first half of this fiscal with the changes in interest rates have seen a substitution of bank credit with debt capital, which also supported wholesale credit growth last year, especially in the first half. But this is not seen to the same extent this year.

Finally, given the strong growth in fiscal 2023, especially in the second half, the high-base effect will also be a factor, said the agency.

The retail credit, which is 28 per cent of overall credit, is expected to continue to grow at a healthy rate of 19-20 per cent, similar to last fiscal.

According to Krishnan Sitaraman , a senior director and chief ratings officer at the agency, the next fiscal should see a turnaround in overall credit growth and start inching up on the back of an expected improvement in GDP growth to 6.9 per cent. Within this, wholesale credit is likely to see a modest increase to 11.5-12 per cent, while retail should continue to remain the key growth driver, expanding steadily at 19-20 per cent. Agriculture credit growth should remain range-bound at 9-10 per cent.

Corporate credit, which is 45 per cent of overall bank credit, is likely to pick up next fiscal from the current fiscal level, driven by a more than expected revival in private industrial capex on the back of more capex announcements next fiscal.

On the services side, demand from non-banks should continue to support corporate credit growth on the back of their decent growth tailwinds.

In the MSME segment, which is 15 per cent of overall credit, the credit demand should be steady hereon, given their role in the overall economy and the flow-through impact of the productivity-linked incentive scheme. Further, with the steady push for the formalisation of the sector, including improving digital public infrastructure, the addressable base for banks should increase over the medium term, Sitaraman said.

Retail credit growth, which should remain robust at 19-20 per cent next fiscal — similar to the previous two fiscals, will be driven by steady demand for home loans, the largest sub-segment of retail credit.

Unsecured loans (personal loans and credit cards) are expected to grow faster, driven by greater digitisation, a shift to organised credit, and increasing comfort with borrowing for discretionary spending.

According to Subha Sri Narayanan , a director with the agency, overall, while demand drivers for credit are expected to sustain a 13-14 per cent growth in the next two fiscals, it will also be important from a funding perspective that deposit growth does not lag too far behind.

He expects the differential between credit growth and deposit growth to narrow to 200 bps from the 500 bps seen in fiscal 2023 as deposit rates continue to inch up.

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