For someone who is neck-deep in debt, the idea of settling it all at an amount much lower than what's actually due can be highly enticing. This is exactly what debt settlement is- an option to clear the debt at a lower amount. However, there are consequences for exercising this option. But first things first:
When a person defaults on a loan or is unable to repay it for some reason, then the lender offers the option of this. By agreeing to this offer the person can have the debt cleared by paying only a portion of the full amount.
Usually, banks propose settlement when the interest amount becomes higher than the principal amount itself. However, in case the loan is a secured loan then they don't need to offer this option. This is because in a secured loan, such as a home loan in which the property is provided as collateral, the lender can seize it if the borrower is unable to repay the loan. Thus, they can get their money back by selling off the property.
This generally becomes necessary in the following situations:
If you agree to go with the settlement option then you stop receiving calls from loan recovery agents. You can then negotiate with your bank how much debt you want to reduce for the settlement. Once you have paid the agreed-upon amount you no longer are bound any obligations and your ledger is closed.
Settlement may grant you relief in the short-term but it also creates long-term problems. The reason behind this is that when you settle for this, the bank mentions the act in your credit report. So, when you apply for a loan or a credit card in the future and the lenders check your credit report, they find out about your history of settlement. This raises red flags and makes it almost impossible to get a loan approval.
The consequences of these are often grim. The measures you need to take to reverse its impact go beyond those of a simple bad credit fix. To increase credit score after taking damage from these types of settlement can easily be a herculean task, especially if you are going to do it yourself, on your own. Thus, it's best if you could avoid it at all costs.
The truth is- it's never a good idea to choose the option of debt settlement. Many people who have limited knowledge on the subject happily agree to settle their debt at a lower amount. However, when they apply for another loan in the future, then convincing a lender becomes a nightmare. They start finding solutions for bad credit score; try all kinds of ways to improve CIBIL score fast. However, it's difficult to recover from the loss that settlement causes to your credit report.
Banks usually propose settlement when you have not paid an EMI for a long time, or have defaulted on a loan altogether. However, you can explain yourself, give honest reasons why you are unable to repay your loan. It's entirely up to you how to convince then, but convince you must. Try to get some more time, and do whatever you can to repay the loan balance. Many people go through rough times in their lives, and it's alright if you are going through it as well. Try to fight through it but don't choose the option of it.
It's unfortunate how so many people choose debt settlement for an easy way out, unaware of the damage it can do. If you know someone who is mulling over the same, then tell them about its impact. You can save them from wrecking their credit report.