A loan comes with many responsibilities such as making sure you pay it back according to the loan settlement terms. Apart from ensuring that your creditworthiness remains intact, this also shows lenders and other similar lending institutions that you are responsible with your finances.
While this may seem like the ideal, there are loan settlement terms which are quite difficult to understand or which may be easy to overlook. By understanding the specifics, these will hopefully help you keep tabs on your finances.
If you are thinking of getting a loan or thinking of getting a loan settlement in these struggling times, chances are you’re looking for clarifications before you make the big leap. Take the time to go over your contract and look out for these loan settlement terms.
What does a Loan Settlement Mean?
A loan settlement is a type of arrangement that allows borrowers to pay back a huge portion of their existing loan. Normally made between a borrower and a lender, this particular agreement asks for a big one-time payment in order for the lending institution to forgive and forego the rest of debt.
A loan settlement may be obtained from a lender if the borrower is absolutely unable to make repayments. This can be due to a sustained injury, illnesses, job loss or unemployment, or any other viable reason.
For this to work, borrowers are urged to inform their respective lenders. In turn, lending institutions may give borrowers ample time to relieve themselves from paying their dues prior to offering the one-time repayment option. This will already settle the loan.
Loan Settlement Terms You Need to Understand
If you are interested in undertaking a loan settlement, below are some terms you need to familiarize yourself with. This way, you know the terms and conditions you are grappling with and you know what you are in for.
For those who may have easily overlooked their contracts, you might have failed to notice the loan principal clause or what this even means. In short, loan principal is the amount you are borrowing or have borrowed from a lending institution.
This is accompanied by interest, which is defined as the extra charge which tends to accrues balances over time.
Equated Monthly Interest (EMI)
EMI is the amount you will have to repay the lender every month. It is composed of the principal value you have to return monthly and the interest based on the agreed-upon rate stated in your contract.
One important factor in determining the EMI is the type of interest rate of the loan, which can be fixed or variable. Having a fixed interest means that the rate will remain constant throughout the tenure.
On the other hand, you will have to deal with changes with variable rates. This means that the percentage can go lower or higher depending on the Standard Rate prevalent in the market.
Tenure of Loan
The monthly payments are heavily based on the tenure of the loan. This means that the overall amount which you will be required to pay factors in how long the agreement is set between you and the lender.
A good rule of thumb would be to remember that the longer the tenure of the loan, the lower you’ll have to pay on a monthly basis. Shorter loan tenures, on the other hand, command a higher price tag but relieve you of your debt in a much faster manner.
Obtaining a loan means borrowers have an obligation to pay their borrowed amount by a specific due date. Penalties will be incurred in the event a borrower fails to make these payments on time.
This can result in a higher payments as there are late fees and payment penalties involved, with lenders having the capacity to charge accordingly.
Besides late fees, there are also pre-payment penalties you have to look out for. For those who are able to make payments earlier than arranged, you may be charged up to 3% to 5% of the outstanding principal amount.
The Bottom Line
Repaying your loan can take a huge weight off your chest, especially as you deal with stresses and expenses during these trying times. Now that you know the important loan settlement terms, you can start planning on the best strategy to pay off your loan.