If you are struggling with your personal loan, then you are not the only one. With frequent job losses, medical emergencies, many people in India are finding it hard to pay their EMIs on time. But neglecting the issue can really damage your credit score and lead to legal and financial troubles.
If you are looking for the smartest way to settle a personal loan in India, this 2025 guide will help you take the smart steps, without any panic or confusion with your personal loan.
What Does Loan Settlement Mean?
It means that you request your bank or lender to close your loan account by paying a one-time payment that’s less than your total outstanding dues. This is different from property reclamation, where you pay the full remaining loan amount.
In simple and short terms, loan settlement is like saying “I’m in real financial trouble and unable to pay the full loan amount, here is the best I can offer right now.”
Note: Loan settlement impacts your credit score in a negative way. But if you really can’t pay, it is still better than fully defaulting.
When Should You Settle a Personal Loan?
Not all people can ask for loan settlement. Banks only agree in serious situations like:
If you lost your job and are now unable to fund another soon.
If you have a serious illness or disability.
If your business failed to perform suddenly.
The borrower has passed away, in that case the family can settle it.
Only if your situation is genuine and you have no other options left, then you can think about settling the loan.
Smartest Way to Settle a Personal Loan in India
Here is a step-by-step guide to settle a personal loan in India right way:
Step 1: Talk to Your Lender Early
As soon as you know that you can’t repay the loan amount on time, immediately contact your bank or NBFC and don’t wait for things to get worse.
Being honest early can really help you and the bank may even offer a reorganising plan, which is better than settlement and won’t ruin your credit score too much.
Step 2: Ask for Loan Restructuring First
Restructuring of loan is different from loan settlement, in which the bank may:
Lower your EMI by providing you a longer loan term.
Give you a break from EMIs for some time, but it will be a temporary break.
Shift the unsecured loan into a secured loan with lower interest.
By doing this first, it can help you save your CIBIL score.
Step 3: Apply for Loan Settlement with Proof
If restructuring of your loan isn’t possible, then write a formal request letter to your bank, where you ask for settlement. Share documents like:
Letter of job loss
Bills of hospital or medical certificates and medicines.
Proof of income loss
If the bank is satisfied, then they may offer you a settlement amount, which can usually be between 60% to 80% of your total dues.
Step 4: Get a ‘No Dues Certificate’
Once you pay the agreed amount to the bank, ask for a No Dues Certificate (NDC) and a written statement that confirms your loan account is closed
Don’t lose this document because this is very important and it protects you from any future legal troubles and recovery calls.
Step 5: Check Your CIBIL Report
Even after your loan settlement, your CIBIL report will show the loan as “Settled”, not “Closed”, which is a red flag.
Check your credit report to make sure the bank has updated the status in the correct way after 2 to 3 months.
Then work on restoring your credit score by doing this:
Paying all future EMIs before the due date
Using a secured credit card and paying back in full amount
Avoid taking new loans unless it is urgent
Key Tips Before You Settle a Personal Loan in 2025
Avoid fake agents: Some bank agents may promise to fix your loan in return for free. Stay away from this kind of offer. Only deal with your bank directly.
Don’t ignore recovery notices: If you ignore bank calls or notice letters, they might take legal action against you under the SARFAESI Act, which allows them to seize your property.
Use settlement only as a last option: If you think that you can pay in full or reorganise the loan, then do that instead. Because settlement is better than default and it is still bad for your credit.
Check if your loan has insurance: If you have loan protection insurance and your claim is valid, then it can repay part or all of your loan amount.
Negotiate smartly: If your financial problem is real, you may be able to settle for a lower amount. Just be calm, respectful, and honest about your situation while negotiating.
What Happens After a Personal Loan is Settled?
Once you pay the full loan amount and get the No Due Certificate successfully, then the lender will update your CIBIL report as “Settled”. This stays on your report for at least 7 years and it can make it difficult to:
Get new loans in future
Apply for a credit card
Get a home loan or business loan
But the good news is that, with a disciplined financial strategy, you can easily rebuild your credit score over time.
Conclusion
If you want to settle a personal loan in India in 2025, just remember that it should be your last option, not your first. Always make sure to repay your loan amount in full or restructure the loan.
But if you are trapped, then don’t try to hide it. Speak to your bank immediately, explain to them your situation, and follow the legal process to settle the loan property.
With the right mindset and strategy, you can easily come out of debt and still protect your financial future while protecting your CIBIL score too.
FAQs
Does settling a personal loan affect my credit score in India?
Yes. Settling a personal loan affects your credit score and it stays there for 7 years.
How much do I have to pay in loan settlement?
Usually you have to pay between 60% to 80% of your total dues and it depends on your bank and your situation.
Can I take another loan after settlement?
Yes you can, but it may be difficult for a few years. Just aim to rebuild your credit score first.
Is loan settlement legal in India?
Yes it is legal and it is an agreement between you and your bank to close the loan with a limited payment.
Can I use an agent to settle my loan?
You need to avoid this method and always talk directly to your bank to avoid frauds.