Loan Settlement is an agreement between a borrower and a lender to close a loan account by paying a reduced amount instead of the full outstanding balance.
Loan Settlement usually happens when a borrower is unable to repay the full loan due to financial difficulties. The lender may agree to accept a partial payment as full and final settlement.
While it provides short-term relief, it negatively impacts the borrower’s credit profile, as it is reported as “settled” instead of “closed” to credit bureaus like TransUnion CIBIL.
"A borrower with ₹1 lakh outstanding negotiates with the bank and settles the loan by paying ₹70,000."