HOW IS LOAN SETTLEMENT BETTER THAN CONSOLIDATION

By Antabikhya Gogoi, Legal Intern at Emkay Solutions and a 3rd Year B.A. LL.B.(Hons) Student at NLU Assam

INTRODUCTION

Today’s modern world runs on credit –- whether it's through multiple credit cards or multiple loans such as education loans, home loans, personal loans etc. Managing all of them can be a huge burden and quite overwhelming. Oftentimes, a person may face financial difficulties which may cause a hurdle in debt repayment. A few major debt relief options are loan settlement and loan consolidation — where a loan is settled by paying a portion of the loan sum back and combining multiple loans into a single loan respectively.

WHAT IS LOAN SETTLEMENT?

Loan settlement is the act of paying back a portion of the loan sum in order to settle the debt. In simple terms it is an agreement between the borrower and the lender where the borrower pays a lump sum amount that is less than the total outstanding dues, and the lender agrees to “settle” the loan by accepting that reduced amount. This is usually availed when the borrower faces financial difficulties and after the settlement, the lender closes the loan account as “settled”. This is a one time settlement instead of a full loan repayment.

WHAT IS LOAN CONSOLIDATION? 

Loan Consolidation on the other hand means combining multiple loans into a single loan with a single monthly payment. This is usually done so at a lower interest rate or longer repayment term to reduce the debt burden. 

WHY LOAN SETTLEMENT IS BETTER THAN LOAN CONSOLIDATION?

• Debt Relief: Immediate debt relief is one of the main advantages of choosing a settlement loan. A loan settlement for less than what is owed might provide a great deal of relief and stop additional financial strain for borrowers who are having trouble making their loan installments.
  

• Repayment Plan Negotiation: Because the loan settlement procedure permits negotiation, one may be able to pay off their loan for a smaller portion of the total. One can save a lot of money by doing that.
  

• Faster Resolution: A loan settlement may result in a quicker resolution than repaying the entire amount over a number of years. One can pay off all their debt all at once and go on.
  

• Avoids Prolonged Interest: Consolidation extends your repayment period while settlement skips that cycle by offering a lump-sum deal. Unlike consolidation, which stretches the loan over several more years, settlement offers a one-time exit from the financial burden. It’s fast and final.

CONCLUSION 

Loan settlement or debt settlement means “settling” the debt by paying back a portion of the loan typically as a one-time payment agreed upon by the lender and the borrower. This option is generally considered when the borrower is unable to repay the full loan amount due to financial hardship or other unavoidable circumstances. If you're at a point where repayment is impossible, loan settlement is the best route as it can be a savior when used correctly. When approached wisely and with proper guidance, it can offer much-needed relief, help avoid legal complications, and provide a fresh financial start.