There are two main ways to interpret “settle” your loan amount:
Pay off the full amount: This is the ideal scenario and simply means paying back the entire loan principal, interest, and any fees. This will close your loan account and improve your credit score.
Negotiate a settlement: This involves coming to an agreement with your lender to pay less than the total amount owed. This is typically a last resort option as it can have negative consequences:
Reduced credit score: Loan settlements are reported to credit bureaus and can stay on your credit report for up to seven years, making it harder to qualify for future loans or credit cards.
Tax implications: The forgiven debt amount may be considered taxable income by the IRS.
Negative impact on future loan applications: Lenders may be less likely to approve you for future loans if you have a history of loan settlements.
Here’s how the settlement process works:
Contact your lender: Explain your financial hardship and inability to repay the full amount.
Propose a settlement amount: This should be a realistic sum you can afford to pay in full.
Negotiate: Be prepared to discuss your situation and why you can’t repay the full amount.
Get it in writing: Once you reach an agreement, get written confirmation of the settlement terms, including the amount to be paid and the deadline.
Before opting for a settlement, consider these alternatives:
Loan modification: Negotiate with your lender to extend the loan term or reduce the interest rate, making the monthly payments more manageable.
Debt consolidation loan: Consolidate multiple debts into a single loan with a lower interest rate.
Sell assets: Consider selling assets like unused vehicles or electronics to raise funds for repayment.
It’s wise to talk to a credit counselor about your options. They can help you create a budget, negotiate with your lender, and explore debt repayment strategies.
