A lot of people take personal loans to cover expenses they can't otherwise cover with their own savings. Examples include buying a car, higher education, home purchase, etc. However, when the interest rate is high and/or your expenses grow even though your salary doesn't, then it can be challenging to repay your debt. This is where the problem of defaulting comes in.
When you fail to repay a personal loan like HDFC personal loan, ICICI personal loan, etc., then it's called loan defaulting or simply "defaulting". It's a serious problem for not just you but also for the lender as their balance amount for the loan is "stuck" with you.
When a loan borrower defaults on their loan or simply refuses to repay the loan, then the banks often offer to settle their loan account for a lesser amount than they actually owe. The idea is that since they assume that the borrower won't repay the loan at all, it's better to get whatever money they are willing to pay instead of the full amount. This arrangement which is usually called “loan settlement” comes with a catch though.
When you settle your loan account for a smaller debt than the original, then you are no longer obligated to pay any more money to the bank. However, in doing so, you greatly harm your own credit report. In case your situation falls under the "personal loan bad CIBIL score" category, which means that you took a loan with a low CIBIL score, then your score can drop even further.
When you settle your loan for less than the actual debt, then the lender mentions the same in your credit report i.e. the CIBIL report. This remark alone serves as a major red flag for all your future lenders. In other words, you will have a really hard time getting a personal loan of your choice whether it’s HDFC personal loan, SBI personal loan, etc. In fact, it’s very much possible that you may not get a loan at all. This is because no lender will ever trust you after realizing that you weren’t able to repay a loan in the past.
If you are unable to repay a loan for whatever reason, and your bank offers the option of debt settlement, then you do must not accept it. Instead, you can try the following:
No matter what the case, debt settlement is never a good option. In fact, if there is one thing worse than personal loan bad CIBIL score, then it's a credit report that has a comment about "settlement".
It all boils down to this- if you get an offer of debt settlement, then no matter how attractive it appears, it will do more harm than good in the long run. Thus, instead of accepting the offer, you should try the different solutions shared above. These will protect your CIBIL score and help you repay the loan easily. Good luck!