Is Loan Settlement Legal in India? Everything Borrowers Need to Know
Loan settlement is a legal process in India, but it negatively impacts your credit score.Summary
Loan settlement is a legally valid process in India, recognized by the Reserve Bank of India (RBI), and is typically offered to borrowers in genuine financial distress. It involves a formal negotiation where a borrower pays a reduced lump-sum amount to resolve an account, often referred to as a One-Time Settlement (OTS). While this process is legitimate and provides a structured exit for those unable to repay the full amount, it is not a loan waiver or a shortcut. A settled loan is reported to credit bureaus with the status "Settled," which remains on the credit report for up to seven years and negatively affects the CIBIL score. However, for borrowers already in default, the damage from continued non-payment is often worse than the impact of a documented settlement. The process involves the account moving to an NPA status, followed by negotiation between the borrower and the bank to agree on a reduced amount and payment timeline. Platforms like FREED assist borrowers by managing the settlement process, handling recovery calls, and providing guidance on credit repair.
(Source：News 18)