Are you dealing with debt and struggling to see a way out? A loan settlement could be an option for you. Negotiate a settlement with your lender. Interested to find out more? Read on for Monzi’s comprehensive loan settlement guide.
Please note, certain ideas and products presented in this article may not be offered by Monzi nor the lenders we work with. This article presents only general information. Consider seeking professional financial, taxation, legal or other advice to check how the information and ideas presented on this website relate to your unique circumstances.
Loan settlement meaning
A loan settlement is a form of debt agreement in which you negotiate with your lender to reduce the amount you owe. However, with this, you must make a lump sum payment to cover the outstanding amount.
More often than not, the amount you negotiate will be a fixed percentage of what you owe (e.g. 80%). However, this amount can vary widely depending on your outstanding balance, financial situation and the lender’s policy. As a result, you may need to pay anywhere from 40% to 90% as a lump sum.
Finally, it’s worth understanding that loan settlements won’t be available for most debts. Typically, they will only be offered for small unsecured personal loan debts (e.g. credit card debt).
Loan settlement process
A loan settlement typically won’t be offered unless you are significantly in arrears and experiencing financial hardship. Moreover, they are generally only an option for small, unsecured debts.
If this occurs, your first step will be to contact your lender and communicate with their financial hardship department. From there, you can outline your circumstances as well as what you would like to do. For instance, maybe you can afford a 70% settlement.
Your lender will then consider this information and negotiations may occur to reach a final settlement. Following that, you will need to make the lump sum payment to cover the cost of the settlement.
At that point, your debt will be repaid and your dealings with the lender will be complete.
Loan settlement calculator
Your loan settlement figure is usually calculated as a percentage of your current outstanding balance. If you reach a settlement with your lender, then they will outline this figure for you.
However, if you would like to know if a loan settlement would be affordable for you, then it’s possible to do the calculations yourself. Given that you must make a lump sum payment, you will need to know what you can afford based on your savings.
So, multiply your current outstanding balance by a range of percentages (e.g. 80%) and compare that to the amount of cash you have available. That way, you can enter negotiations with your lender with a clear idea of the settlement that would be affordable for you.
Can I get a loan settlement?
Loan settlements exist to assist borrowers who are suffering significant financial hardship. To determine if you are eligible, you must contact your lender.
All lenders will have hardship departments in place and they will be able to run you through your options. In most cases, a loan settlement won’t be the only avenue for you.
As a guide, other options that your lender may potentially offer include:
- Modified repayment schedules.
- Repayment holidays (you won’t need to make any repayments for a brief period)
- Reduced interest rates
Home loan settlement process
Through the course of your research, you’ve probably come across the home loan settlement process. In short, loan settlements and home loan settlements are two very different things. Unfortunately, they just have similar names.
The home loan settlement process essentially described the transfer of ownership from the seller to the buyer.
By comparison, a loan settlement involves reaching an agreement with your lender regarding your outstanding debt and how it will be repaid.
How does a loan settlement affect your credit?
A loan settlement may hurt your credit score.
In short, while your debt will be repaid, it won’t be for the full, outstanding balance. With this, it will be recorded on your report as an account paid for less than the full amount owed. This will result in damage to your credit score.
In addition to this, any missed repayments in the lead up to negotiating a settlement will also be listed on your credit report and will work to lower your score.
Typically, these listings will remain on your credit score for up to seven years.
Can I get a loan after settlement?
Once your loan has been settled, you can apply for other loans. However, realistically, this defeats the purpose of settling your debt. Reaching a loan agreement to then go back into debt seems like a backward step.
In any case, as mentioned, a loan settlement has ramifications for your credit score. As a result, following a loan settlement, it may be significantly harder to access credit. Lenders may be unwilling to consider bad credit applicants meaning your application will not be approved.
Is it better to settle or pay in full?
If you have the capacity, then it’s always better to pay in full. This is because, as we’ve discussed, a loan settlement will be recorded on your credit report as an account paid for less than the full amount owed. This will harm your credit score.
Obviously, though, paying in full isn’t always an option if you are experiencing significant hardship. As a result, a settlement may be the only option that you have. With this, you will have to accept that your credit score will be impacted. However, the benefit is that you will be out of debt.
Is a loan settlement a good option?
In short, Monzi cannot answer this. In most cases, whether it is a good option or not will depend on your financial situation and the options available to you.
From a positive perspective, a loan settlement may help you get out of debt now, at a cost that is less than what you owe.
On the other hand, as we’ve already discussed, the damage to your credit score can be considerable. This is not only because you are settling for less than you owe, but also because a considerable number of missed repayments are required before a loan settlement is even an option.
As a result, a loan settlement can significantly hinder your ability to access quick loans online in the future. With this, you will need to evaluate the pros and cons to determine if it is a good option for you.
What percentage should I offer to settle my debt?
Ultimately, your lender will determine the percentage that you must pay as a lump sum to reach a loan settlement. This percentage can vary significantly depending on your loan, current financial situation and the lender’s policies.
As a guide, some lenders may be prepared to accept a lump sum of under 50% for some unsecured bad credit debts. However, this won’t always be the case. Often this figure can range up to 80% or more.
Given this, we are unable to provide an exact figure that you should try to pay. At the end of the day, your lender will work with you to reach a figure that suits both parties.
Can I remove settled debts from my credit report?
You do not control what is and isn’t recorded on your credit report and you cannot remove unfavourable listings. In short, the only antidote is time.
Settled debts will remain on your credit score for seven years. However, once that period has elapsed, it will then be removed.
Can I negotiate a loan settlement on my own?
Yes. While there may be debt management companies willing to do it on your behalf, it is possible to do it yourself.
If you opt to go it alone, your first step will be to contact your lender and speak to their financial hardship department. From there, you can outline your situation. Based on that information and the outstanding balance on your loan, your lender may work with you to develop a plan on managing the situation.
As a general rule, aim to keep your demands at a reasonable level. In other words, meet your lender halfway. While they may be understanding of your situation, you must make an effort too.
Can I reach a loan settlement on a secured debt?
Typically, no. Usually, lenders only offer loan settlements to resolve small, unsecured debts.
From a lender’s perspective, this is understandable. With a secured loan, you would have guaranteed the loan with one of your assets. As a result, should you default on your repayments, your lender will still have an avenue available to recover their losses. With this, a loan settlement provides them with little benefit.
On the other hand, if the debt is unsecured, then a loan settlement allows the lender to recover a portion of the loss incurred.
What other options do I have?
While a loan settlement is one option, there are other avenues that you can explore too.
For credit card debts, a balance transfer can be a useful strategy. This involves transferring your existing debts onto one, low-rate card. That way, you can save on interest payments and you only need to worry about one credit card.
In addition to this, debt consolidation loans could be another option. In short, a debt consolidation loan involves borrowing money to repay your outstanding debts. As a result, you’re simply left with one loan. That means there’s only one interest rate, one repayment and one outstanding balance for you to worry about.
Ultimately, it’s up to you to determine which option is best for you. If you’re unsure, consider seeking qualified financial advice.
Is there help available?
Yes, if you’re struggling with debt, then there is help available.
Contact the National Debt Helpline on 1800 007 007 for confidential financial advice from a range of certified financial professionals. The hotline is open from 9:30 to 4:30 during weekdays and is free to use. Alternatively, if you cannot call, then you can visit the National Debt Helpline website which provides a range of free information to help you manage your debts.
Similarly, the Australian government’s Moneysmart website is a great source for a range of useful financial information.
Finally, there may be a range of state-based financial counselling services you can visit for advice. Do your research to determine what services are available in your area.