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Published March 21, 2023
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How to Negotiate a Personal Loan Settlement

By negotiating a personal loan settlement, you may be able to pay off the debt for an amount that's less than your current balance. You can negotiate settlement yourself, or with the help of professionals.

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If you ever find yourself unable to keep up with the payments on a personal loan or loans, you could consider debt settlement. By negotiating a personal loan settlement, you may be able to pay off the debt for an amount that’s less than your current balance. 

Debt settlement of any kind can have consequences for your credit score and personal financial profile, however; be sure you understand the impacts, and any alternatives, before you pursue settlement. 

Should you negotiate a personal loan settlement?

Debt can get out of hand quickly if you borrow more than you need or often rely on personal loans to make up for a lack of income.

Anyone can get into serious debt, regardless of economic status, and getting out of debt isn’t easy. It’s important to ask for help and investigate your options sooner rather than later.  

Situations where you may want to consider personal loan debt settlement

  • You have multiple personal loans with high interest rates.
  • You have a high-balance personal loan.
  • You have more than one missed or late payment.
  • You’re constantly worried about your debt.
  • You’ve been contacted by a debt collector about your personal loan.

Personal loan settlement options

There are various ways to settle your personal loan debt. The most common options include:

  • Doing it yourself. Contrary to popular belief, it is possible to negotiate a payment plan or settlement directly with your personal loan lender.
  • Using a credit counsellor. For those looking for a bit of guidance, seeking the help of a credit counselling agency can help. There are not-for-profit and for-profit companies that can help guide you with a debt settlement plan. The Government of Canada’s website has a handy guide to choosing a legitimate credit counselling agency
  • Using a licensed insolvency trustee. If your personal loan debt has become completely unmanageable, you could work with a licensed insolvency trustee that can negotiate with your creditors directly. Depending on your current debt load and assets, they may recommend debt settlement, debt consolidation, a consumer proposal, or even declaring bankruptcy.

Nerdy tip: Always research the reputation of a debt settlement company before hiring them to act on your behalf. Not all so-called debt settlement firms in Canada are honest, and many scams abound. Be on the lookout for high fees, requests for payment before your debt is settled, or promises that seem too good to be true.

How to negotiate a personal loan settlement on your own

Many Canadians will work with a debt settlement company to settle their debts, but it is possible to do things yourself. To do so, you would take the following steps:

  • Have your story ready. Creditors will only negotiate with people who present valid reasons for needing debt settlement.
  • Create a budget. You’ll need to figure out what monthly payment you can reasonably afford each month.
  • Speak to someone who you can help. Frontline customer service may not be the right people to speak with about debt settlement. You want to negotiate with someone who can authorize a settlement plan. 
  • Tell them your plan. Explain to the person that you’re looking for debt relief and what interest rate and/or payment you can reasonably afford.
  • Review your agreement. If they offer a debt settlement agreement, read the document carefully before signing. Pay close attention to any terms and conditions pertaining to fees, interest rates and late payments.

Pros and cons of personal loan settlement

While the advantages of personal loan settlement are often clear, the disadvantages aren’t always obvious. That’s why you need to consider the pros and cons before deciding.

Pros of settlement

  • You’re less likely to miss a payment. By negotiating a reduced loan principal or lower interest rate, your monthly payments should become more manageable.
  • Your debt-to-income ratio goes down. When a portion of your debt is forgiven via settlement, it has a positive effect on your DTI ratio, which may have a positive impact on your credit score in the long run.
  • You avoid bankruptcy. If you go the consumer proposal route, you can avoid bankruptcy. This would allow you to keep all of your assets and give you protection against your creditors.

Cons of settlement

  • Creditors can refuse to settle. While personal loan lenders are typically open to arrangements that allow borrowers to continue making payments, they don’t have to negotiate a settlement with you.
  • Your credit score could take a major hit. Any type of debt settlement will have a negative impact on your credit score. This may make it quite a bit harder to be approved for other types of credit, like credit cards or car loans, for a few years.
  • It isn’t free. There are often fees associated with debt settlement, particularly if you hire a service to negotiate on your behalf.

Other ways to deal with personal loan debt

If you’re unable to negotiate a personal loan settlement, and debt consolidation isn’t an option, then you should seek the services of a licensed insolvency trustee, as they’re federally regulated professions. Options they may offer include:

  • Consumer proposal. This is a formal contract made to your creditors for debt relief. If accepted, it can reduce how much you owe significantly. The major advantages of a consumer proposal are, you get to keep your assets, you get creditor protection, and you avoid bankruptcy.
  • Bankruptcy. If you can no longer pay your bills and debt relief is not available, bankruptcy may be your only option. When going this route, you will lose most of your assets. That said, you would keep most of your personal belongings. Your debts are legally discharged at the end of your bankruptcy.


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