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Many times we take a loan, but due to some reasons are not able to repay it on time. If you do not repay your loan for 91 consecutive days, the bank puts it in the category of Non-Performing Asset (NPA).
Following your request, the bank offers you a lump sum settlement. This is called OTS. In OTS, the defaulter has to repay his outstanding principal amount in full, but the interest amount as well as penalty and other charges may be waived partially or completely. In some cases, there is some relief in the principal amount also. But should you choose this option? Know about it here.
Loan settlement does not mean closing the loan-
Financial advisor Shikha Chaturvedi says that by settling the loan, you get rid of the recovery agencies and the loan taker can repay the dues by accepting the terms agreed with him and the bank. But never make the mistake of considering loan settlement as loan closure. Loan closure occurs when the borrower repays all the EMIs.
This loss occurs due to loan settlement-
In case of loan settlement, it is considered that the borrower did not have money to repay the loan. In such a situation, the credit score of the borrower decreases. It may be 50 to 100 points or less. If the borrower settles more than one credit account, the credit score may go down even further. In the Account Status section of the credit report, for the next seven years it can be mentioned that the borrower's loan has been repaid. In such a situation, it becomes almost impossible to take loan again for the next seven years. You may also be blacklisted by the bank.
what should be done-
Shikha says that if you have no option other than loan settlement then you can definitely choose it, but there is also an option to convert the settled account into a closed account. When you become financially capable, you go to the bank and say that you want to return the outstanding i.e. principal, interest, penalty and whatever rebate you have received on other charges. After making this payment, you get a certificate of no-due payment from the bank. Do take it. The bank then informs the credit bureau that your account has been closed. With this your deteriorated credit score also improves.