EMI Restructuring vs Loan Settlement: Which Is Right for You?

You might come across two popular options if you are facing some financial distress and struggling to repay your loan due to job loss, medical emergencies or unexpected expenses. Those two popular options are EMI restructuring and Loan settlement. Both the options can provide you relief but they work in their own respective ways. In this blog, we will discuss about EMI restructuring and loan settlement in detail to help you decide which option is better for your situation.

What Is EMI Restructuring?

EMI restructuring is a process where the bank or a financial institution agrees to change the terms of your existing loan. This is done to make it easier for you to repay your dues. You can think of it as modifying your current loan terms without actually closing it. The bank may give you more time to repay, reduce your EMI amount/interest rate or offer a temporary pause on the payments (called a moratorium). In simple words, you continue to be a customer of the bank but you have to follow the new repayment plan that has been offered to you by them.

Key Facts of EMI Restructuring

• It can be done for home loans, personal loans, car loans and others.
• There is no need to settle or close the loan early.
• You still have to repay the full loan amount with interest.
• The bank may ask you to provide supporting documents in order to validate the request.

What Is Loan Settlement?

In a loan settlement, when a borrower is unable to repay the loan in full, the bank may agree to take a lump sum payment that is less than the actual amount due and waive off or write off the remaining amount. It helps the lenders to recover a certain part of the loan and they waive off the remaining amount. After the settlement, the loan account will be marked as “settled” instead of “closed”.

Key Facts of Loan Settlement

• It is usually allowed after repeated defaults or serious financial problems.
• It needs proper documentation and communication with the lender.
• It is the last resort to close a loan when you genuinely can’t repay the full amount.
• After loan settlement, the rest of the amount will be waived off by the lender.

When Should You Choose EMI Restructuring?

EMI Restructuring is good for people who are experiencing temporary financial issues. For example, if you have lost your job recently, had medical emergencies or your business is going through a rough phase, then there is no harm in considering this option. Moreover, if you feel like you can recover soon and repay the loan with a revised plan, then also you can think of taking help from it.

You can also opt for this option if you are confident that you can manage your expenses better with a lower EMI amount. It helps you to maintain your financial credibility without explicitly defaulting on the loan. The banks usually prefer this option as it helps them retain you as a customer and avoid legal action.

When Should You Consider Loan Settlement?

Loan Settlement is usually the last resort for people who are struggling financially or unable to repay their loan amount despite all the efforts. It shall be your last resort when you are facing some problems where the money is unlikely to return any sooner. In a settlement, you are supposed to contact the lender or bank and explain to them why you can’t pay the full amount. Then, they will thoroughly analyse your situation and approve your settlement. After that, you will have to pay the decided amount and your account will be closed.

Impact on Credit Score

Now, we will discuss the impacts of each option on your credit score.

• In EMI Restructuring, the lender updates your loan terms with credit bureaus. There might be a small drop in your credit score in the beginning but if you follow the new plan properly, your credit score can recover faster than you can imagine.
• In Loan Settlement, the credit report will show “settled” instead of “closed”. It directly shows that you were not able to repay the full amount. Your credit score can fall by 75-100 points or more and stay low for up to several years.

Process to Apply for EMI Restructuring

Let’s discuss the steps if you want to apply for EMI restructuring.

• First of all, you have to contact your lender when you start facing repayment problems.
• You can ask them about the EMI restructuring option after explaining your problem.
• You should provide them documents like income proof, job termination letter or medical bills to support your case.
• After that, you have to wait for the lender to evaluate and approve the revised payment plan for you.
• Lastly, you have to sign the new agreement and start repaying as per the new terms.

Process to Request Loan Settlement

Here are the steps that you need to follow if you want to request a loan settlement.

• You have to contact and explain to your lender why you can’t pay the full amount.
• You should explain your financial problem clearly and request a settlement offer.
• Do not forget to negotiate and ask for the lowest amount that closes the loan.
• It is crucial to get the settlement offer in writing and you should keep it safe for future references.
• Finally, make the payment and ask the lender to provide you with a “No Dues Certificate”. You can consider contacting a reputed loan settlement agency in India who can professionally handle negotiations and help you settle your loan effectively.

Legal and Financial Advice

Both options, EMI restructuring and loan settlement, are legal if done through a proper agreement with the bank or lender. However, there may be tax implications in case of a loan settlement. That is because if the lender waives off a very big amount, then it can be treated as income and can be taxed. For that reason, it is always better to take advice from a certified tax consultant before agreeing to any settlement.

Final Thoughts

There is no doubt that both the options are good to handle unexpected financial pressure. However, they are very different in terms of their impacts especially on your credit score. We understood that restructuring is a positive solution that helps you continue with your loan. On the other hand, settlement is more of a last resort with long-lasting effects on your credit score.

You should reach out to the experts if you are unsure whether to go for EMI restructuring or loan settlement. Loan Resolve Services offers personalised support to help you choose the best option based on your financial situation. We will help you in negotiating with the lenders and guide you through the whole process. Our team also ensures that you get the right solution without damaging your finances and credit score.