Negotiating Your Personal Loan Settlement with the Bank

By Atul Yadav
  | Published: 22 November 2021

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Personal loans are one of the best sources of immediate funds during emergencies. When needed, you can directly approach a bank and based on your financial situation, the bank provides you with a personal loan. Although the loan process is convenient, it can take a long repayment period to get off your debt. Furthermore, getting rid of your loans may put you under a huge financial burden. If you have a big loan amount and are finding it hard to repay, you can consider negotiating your personal loan settlement. 

It may look like a complex task to undertake negotiation with your lender, but the good thing is that everything is flexible when it comes to finances. With the right approach and persuasion skills, you can reduce your debts by 50-70%. The article below acquaints you with the upsides and downsides of personal loan settlement and negotiating your debts with the bank. 

What is a personal loan settlement?

A personal loan settlement is typically an agreement between the borrower and the bank to settle the outstanding loan amount against a large one-time payment. Let’s take a look at it with an example – 

An individual takes a personal loan of AED 100,000 from a bank. Due to some reasons, he finds it difficult to pay the loan instalments but is capable of paying AED 50,000 at once. In this case, he needs to approach the bank and negotiate it for settlement of the loan against this upfront payment. Considering a large one-time payment, the bank agrees to settle and close the personal loan account at the agreed amount while the individual still owes a debt of AED 50,000. 

It might seem confusing why would a bank settle at an amount lower than the total loan amount. To an issuer, a non-repayment possesses a greater risk than settling the loan at an agreed amount. Additionally, the issuer acquires a large chunk of lending at once with a personal loan settlement. 

In most cases, the lender tries to recover all the amount from the borrower and the personal loan settlement is their last choice. However, if you find yourself at a dead-end, it is always better to reach out to your bank and convince them to settle your personal loan. 

Downsides of Personal Loan Settlement

Personal loan settlement may appear to be a convenient way to get out of your debts when left with no other choice, but it comes with various downsides. If you are under a loan and trying to negotiate a settlement, you need to arrange a large upfront amount. Additionally, it degrades your credit score considerably.  

You may cut down your loans by 50-70% with a settlement, but as your credit score gets affected, you will find it hard to acquire a personal loan in future. Additionally, your bank will close the loan account permanently due to poor credit history and track record and you may no longer be the bank’s client. With a low credit score, you can avail of personal loans from other issuers, but the repayment rates will be much higher, making it troublesome. 

Before Negotiating Your Personal Loan Settlement 

Once you have decided to settle your personal loan, you need to consider whether to take up the task by yourself or to consult a professional. Since you understand your financial situation and capabilities, it is better to approach the bank for negotiation by yourself. However, if you find the process complex, you can take a professional’s help to deal with the loan settlement. You should be vigilant while taking assistance from a third party to avoid cons and scams. 

Before proceeding with the personal loan settlement, you need to ensure that you can provide enough evidence that you are in a bad financial situation. To show that, you can cut your expenses and stay on budget for like 6-10 months. It would create sympathy and may convince your lender to waive off your debts with a personal loan settlement.  

Read About What If You Don’t Repay Your Personal Loan In UAE?

How to negotiate your personal loan settlement?

Once you are ready, start by contacting your bank and speaking with the loan officer or your relationship manager. Explain to them your financial situation and incapability to pay off your loans. At the same time, intimate them about money arrangements you are making to repay the portion of the loan. 

While negotiating, you can start with a 30-40% payment to which the bank might disagree. It would probably try to increase the payment percentage, but you need to keep it anywhere lesser than 50% to have a good deal. 

After both parties (you and the bank) agree and finalise a settlement amount, ensure the agreement to be written. A verbal agreement may attract scams and leave you in a greater plight. Additionally, check the settlement amount and make sure it is exactly the same as finalised and that you won’t need to make any additional payment for terminating your loan. 

Conclusion

Personal loans are a good source of liquid funds but can bring unwanted financial burdens if not taken care of properly. In some cases, individuals may get entrapped into debts and need personal loan settlement to end the financial hardship. While negotiating to settle a personal loan, they need to ensure they are providing enough proof of their incapability to repay the loan amount. Additionally, they need to make sure that they are aware of all the downsides of personal loan settlement. It can ruin their credit score and make it hard for them to acquire a loan in future.

Atul Yadav
Atul Yadav

Atul has had a flair for writing ever since he started writing essays in school, which inspired him to subsequently opt for a career in writing. He loves to write about places he's been to (the list is endless) and financial products that can help people make a real change in planning their finances better.