When loan repayments are missed and credit card dues keep piling up, many borrowers start looking at settlement as a way to regain control. A common question comes up quickly: how do banks decide the settlement amount? Is it random, or is there a clear method behind it?
The truth is that banks follow a structured process before agreeing to any loan or credit card debt settlement. Understanding how this decision is made can help you approach settlement realistically, with clarity and confidence.
What is a Loan and Credit Card Settlement?
A loan or credit card settlement is a process in which the lender agrees to close your account by accepting a payment that is less than the total outstanding balance. This option is typically considered only when the borrower is facing genuine financial hardship and is unable to continue regular repayments.
Settlement is not a shortcut or an easy escape. It should only be considered when repayment or restructuring options are no longer viable. From a bank’s perspective, it is a recovery decision made when full repayment appears unlikely.
Why Banks Agree to Settle at All
Banks do not prefer to accept less than what they are owed. However, prolonged defaults come with their own costs and risks. Legal recovery takes time, money, and resources, and there is no guarantee of full recovery.
When a borrower clearly demonstrates an inability to repay, settlement allows the bank to recover at least a portion of the outstanding balance and close the account, rather than keeping the account in default.
Key Factors Banks Consider While Deciding the Settlement Amount
Banks do not randomly quote an amount. The settlement amount is based on multiple factors that together paint a picture of your financial reality and recovery potential.
1. Total Outstanding Dues
The starting point is always the total amount pending. This includes:
- Principal amount
- Accrued interest
- Late payment charges
- Penalties
Settlement discussions usually begin after interest and penalties have significantly increased the balance, especially in credit card cases.
2. Duration of Default
How long the account has been unpaid matters a lot.
- Accounts overdue for 90 days or more are more likely to be considered for settlement
- Long-term defaults signal a higher risk of non-recovery
In some long-standing default cases, banks may evaluate recovery options differently depending on internal policies and risk assessment.
3. Borrower’s Financial Hardship
Banks closely evaluate whether the financial distress is genuine and verifiable. Common reasons include:
- Job loss or salary reduction
- Business failure
- Medical emergencies
- Family crises
Borrowers may be asked to submit documents like income proofs, bank statements, or medical records to support their claim.
4. Current Repayment Capacity
Even during settlement, banks want to understand what you can realistically pay.
They assess:
- Current monthly income
- Essential living expenses
- Number of dependents
- Existing loan obligations
The goal is to arrive at a settlement amount that the borrower can pay, often as a lump sum or within a short timeline.
5. Type of Loan or Credit Facility
Settlement terms differ depending on the nature of the debt.
- Credit cards and unsecured personal loans are more commonly settled
- Secured loans have lower settlement flexibility due to collateral
Settlement considerations may vary depending on whether the debt is secured or unsecured and are subject to the lender’s internal policies.
6. Recovery Stage of the Account
Where your account sits in the bank’s internal recovery cycle plays a key role.
- Early-stage collections may see limited flexibility
- Settlement considerations also depend on the stage of recovery and internal policies of the lender. There is no guaranteed formula.
Banks balance the cost of continued recovery against the benefit of immediate closure.
7. Past Repayment Behaviour
Your credit history is also reviewed.
- Borrowers with a previously good repayment track record may get better consideration
- Habitual defaulters may face stricter terms
A history of responsible borrowing before hardship can work in your favour.
How Settlement Amounts Are Usually Structured
Once the bank evaluates all factors, the settlement amount is proposed in one of the following ways:
- Lump sum payment within a short time window
- A few structured instalments over a limited period
Banks usually offer a one-time settlement with strict timelines. Missing the agreed deadline can result in the offer being withdrawn.
Why Settlement is Considered a Last Resort
While settlement can bring relief, it has consequences.
- The loan or credit card is marked as settled, not paid in full
- Credit scores usually drop in the short term
- Future borrowing may become difficult for a period
This is why settlement is recommended only when regular repayment or restructuring is no longer feasible.
The Importance of Professional Guidance
Negotiating directly with banks can be emotionally exhausting and confusing, especially when multiple lenders are involved. Professional counselling ensures:
- Your financial capacity is assessed correctly
- Professional guidance can help structure communication
- Settlement terms are documented clearly
- You are protected from unnecessary pressure
This is where platforms like FREED support borrowers through a legal, ethical, and empathetic settlement process focused on long-term financial stability.
Conclusion
Banks decide settlement amounts based on logic, risk assessment, and your real financial situation, not guesswork. Understanding these factors helps set realistic expectations and prevents costly mistakes.
If you are considering a settlement, approach it with clarity, patience, and proper guidance. When handled responsibly, credit card debt settlement can help you rebuild your financial life rather than hold you back.