Can a Personal Loan Be Settled for Less Than You Owe?

If you’re struggling to repay a personal loan, you may wonder whether settling the debt for less than the full balance is possible. In some situations, lenders or collection agencies are willing to accept a reduced amount to close the account.

However, settling a personal loan comes with trade-offs that borrowers should understand. This guide explains how personal loan settlements work, when they’re possible, and the potential consequences.

What does it mean to settle a personal loan?

Settling a personal loan means negotiating with the lender or collection agency to accept less than the full amount owed as payment in full.

Once settled, the remaining balance is forgiven, and the account is closed.

When are personal loan settlements possible?

Settlements are most commonly offered after a loan is delinquent, charged off, or sent to collections. Lenders are less likely to settle loans that are current.

How much can you typically settle for?

Settlement amounts vary widely, but many lenders accept between 40% and 70% of the outstanding balance, depending on circumstances.

Lump-sum vs payment plan settlements

Some settlements require a lump-sum payment, while others allow short- term payment plans. Lump-sum settlements often result in lower total payoff amounts.

How settlements affect your credit score

Settling a personal loan typically has a negative impact on your credit score, especially if the account was already delinquent or charged off.

The credit report may reflect the account as “settled” rather than “paid in full.”

Tax implications of settling a loan

Forgiven debt may be considered taxable income. Lenders may issue a Form 1099-C for the forgiven amount.

Risks of attempting settlement

Settlement negotiations can fail, and missed payments during the process may worsen credit damage or lead to legal action.

Alternatives to settling a personal loan

• Hardship programs
• Deferment or forbearance
• Refinancing or consolidation
• Making partial payments

How to approach a settlement negotiation

Contact the lender or collector directly, explain your financial situation honestly, and request written confirmation of any agreement.

When settling may make sense

Settlement may be appropriate if you cannot realistically repay the full balance and want to resolve the debt and move forward.

Frequently asked questions

Will settling stop collections?Yes, once the settlement is completed.

Can I negotiate on my own?Yes, many borrowers negotiate directly without third parties.

Is settlement better than bankruptcy?It depends on your overall financial situation.