Top 5 Mistakes to Avoid During a Loan Settlement in India

Why Avoiding Loan Settlement Mistakes Matters

Loan settlements can be a lifeline for borrowers struggling with debt, but loan settlement mistakes can turn a financial solution into a long-term liability. According to the Reserve Bank of India (RBI), non-performing assets (NPAs) in retail loans rose by 12% in 2024, showing that more borrowers are opting for settlements or restructuring. While settlements can provide immediate relief, even minor errors can push borrowers deeper into a debt trap or create long-term credit issues.

This blog covers the top 5 loan settlement mistakes and practical strategies to help you avoid them.

Mistake 1: Not Understanding the Impact on Your Credit Score

Why It Matters

Loan settlement may temporarily relieve financial pressure but can damage your CIBIL score for up to 7 years. Settled accounts mark you as a high-risk borrower, impacting future loans and credit cards.

How to Avoid This

• Explore Restructuring Options: Discuss alternate repayment plans before opting for settlement.

• Prioritize Full Repayment: Whenever possible, pay in full rather than settle.

• Seek Professional Advice: Book a consultation with AMA Legal Solutions for guidance on the best approach.

Mistake 2: Ignoring Written Agreements

Why It Matters

Relying on verbal commitments can lead to disputes later. Without a written settlement agreement, lenders can still demand outstanding dues.

How to Avoid This

• Always obtain a formal settlement letter.

• Collect a No Dues Certificate (NDC) after the final payment.

• Learn more about loan settlement legal support to ensure agreements are legally sound.

Mistake 3: Settling Without Legal Guidance

Why It Matters

Banks and NBFCs often use aggressive tactics during settlements. Without legal support, borrowers risk signing unfair agreements.

How to Avoid This

• Hire a lawyer experienced in loan dispute resolution.

• Explore alternate dispute resolution (ADR) methods like arbitration.

• Know your rights under the RBI Fair Practices Code (Read RBI Fair Practices Code).

Mistake 4: Overlooking Tax Implications

Why It Matters

If a lender waives part of your principal amount, it may be considered taxable income under the Income Tax Act.

How to Avoid This

• Consult a tax professional before signing a settlement agreement.

• Keep documentation for tax purposes.

• Plan ahead to avoid unexpected tax burdens.

Mistake 5: Delaying the Process

Why It Matters

Delays can result in higher penalties, legal notices, and classification as NPA (Non-Performing Asset), making recovery tougher.

How to Avoid This

• Address repayment issues immediately.

• Respond promptly to all bank or NBFC notices.

• Explore AMA Legal Solutions for quick loan dispute resolutions.

Related Blogs You May Find Helpful

• How to Get Out of a Debt Trap Legally

• Can NBFCs Take Legal Action for Loan Default in India?

• Arbitration Process in India for Loan Settlement Cases

Settle Smart, Avoid Mistakes

Avoiding loan settlement mistakes can save you from a debt trap and safeguard your credit record. Always document agreements, seek legal and financial guidance, and act fast to resolve your liabilities.

At AMA Legal Solutions, we specialize in loan settlements, legal dispute resolution, and borrower protection. Contact us today to safeguard your financial future.

Statistical Fact: According to the RBI, over 20% of NPA borrower errors stem from improper settlements and lack of legal awareness.