Paying off loan troubles is never simple, particularly when dealing with unpaid loans. At times, by virtue of unforeseen life situations, it becomes challenging to repay a loan fully. Under such circumstances, the most popular solution that comes to mind is applying for a settlement loan. Although this may make your financial situation better temporarily, most are concerned with its effect on their credit score. The good news is that you can pay off a loan without damaging your credit reputation for the long term—if you do it the correct way.
Learn What a Loan Settlement Is
When you pay off a loan, you are actually negotiating with the lender to make a payment less than what you initially owed. This is usually done when a borrower cannot proceed with making regular payments because of adversity. The lender accepts a lesser amount and, in exchange, deems the account closed. While this may give short-term relief, it is generally advised as “settled” on your credit report, which lowers your credit rating and affects your future borrowing prospects.
Act Early and Communicate Transparently
The best way to reduce the negative effects of a settlement loan is to act early. Don’t wait until your loan account goes into default or collections. The minute you feel that you are, financially speaking, in a critical condition, contact your lender as soon as possible. When you practice open and frank communication, you demonstrate a sense of responsibility and this also gives you a better chance to reach an agreement that suits you. When a lender has witnessed that the borrower is actually working to adjust the settlement, there is easier acceptance to a settlement discussion than passing into oblivion.
Explore Other Options First
Prior to rushing into a settlement, check whether there are other options. Reduction of EMI or restructuring the loan may be possible based on the policies of your lender. In some cases, the loan may be converted to a longer tenure to lower the EMI burden and the repayment becomes easier. A settlement should only be thought of when there are no other repayment options.
Negotiate Favorable Reporting Terms
If a settlement loan is unavoidable, negotiate wisely. Ask the lender to report the status as “closed” or “paid in full” instead of “settled.” Not all lenders will be willing to comply, but some might if you tell them your story and are willing to work together. This minor tweak in reporting terminology can have a huge impact on how your credit score is impacted.
Get Everything in Writing
Once you & the lender have agreed on the terms of the settlement, ensure all is documented in writing. The written agreement must specify the amount to be paid, the date it should be paid, and how the status of the loan is to be reported to credit bureaus. This will come in handy in the future should there be any inaccuracies in your credit report. Do not make any payments before you have this agreement in your hands.
Pay on Time
After the agreement is signed, pay according to the timeline. Part payment or delayed payments subsequent to a settlement agreement can degrade your credit profile and even create legal issues. Make sure that you follow up in all ways possible. In case you have reached an agreement on a one-time payment in lump sum make sure that the full payment was wired by the given date.
Check Your Report with Settled Debt
Once you have paid, verify in your credit report that the account status had been changed to reflect as paid by the lender. It is not that nothing goes wrong and the account could still show as not paid or pending. If this happens, reach out to the lender with the settlement agreement and proof of payment and request immediate correction.
Rebuild Your Credit Score
Though your credit score will drop following the settlement loan, it is only temporary. It will take patience and self-control to restore your credit score. Start by ensuring you pay all other bills on time, keep the balances in your credit cards low and avoid indulging in unnecessary debts. There is no doubt that your credit score will also rebound and reflect on your improved financial behaviour with time.
Apply Settlements to be a once phenomenon
The use of settlement as a recurrent measure to repay loans is not a money maker. You’ll get away with it this time, but if lenders notice a history of settlements on your record, they will shy away from providing credit in the future. Use it as one-time strategy only in extreme situations and try to keep a good credit habit afterwards.
Your Trusted Partner in Smart Loan Settlements
At Guardian Financial Experts, we assist people like you to settle loans sensibly with our professional settlement loan solutions. We are aware of financial difficulties and walk you through sensible solutions without harming your credit. Let us help you achieve financial freedom—get in touch with us today for customized assistance.