Loan write-off and loan waive-off are important terminologies in the world of finance. These terms are more relevant in scenarios of bad loans. A bad loan is one that has very less chance of being paid back. While these terms may sound the same, there are significant differences between loan write-off and loan waive-off.
This article covers everything you need to know about loan write-offs and waive-offs. Let us understand what they mean and how they differ from each other. Read on!
Writing off loans is a common practice done by banks to keep their balance sheets clean. Once a loan is written off, it still is reflected on the lender’s account as they believe they can recover it at a later date. If the borrower provided any collateral, the lender will seize it until the loan is repaid. To recoup the loan balance, the collateral may potentially be sold at auction. If the borrower hasn’t provided any security, the lender may even file a lawsuit to recover part of the money owed.
The primary reason for writing off a bad loan is to use the funds that were originally set aside for the borrower at the time of borrowing for the company’s ongoing business operations. The lender may occasionally decide to sell off bad loans to third-party collection firms.
When a financial institute or a bank believes that there is no way they will recover a loan given to a borrower, they will forgive the loan. After the loan is waived off, the borrower has no obligation to pay the loan. Additionally, the lender, in any situation will not try to reclaim the loan money or take legal courses against the borrower.
Let us consider a situation where Ben has taken a two-year, immediate loan from a leading bank for Rs.6,00,000. For the first four months, he made regular EMI payments. After that time, he was unable to make ends meet and ceased making EMI payments without notifying the lender first.
After several follow-ups, there was no repayment, and the personal loan’s term expired. The lender tried multiple ways to get Ben to pay the debt, but nothing seemed to work. Due to this, the lender decides to write-off the loan.
When a lender reduces the loan’s original value because they might not be able to recoup the whole amount, this is known as a loan-write-off.
The personal loan is still a recoverable item in the lender’s books of account, thus the borrower is still responsible for paying it back.
Let us consider a situation between two friends Jen and Ken. Jen loaned about Rs.2,00,000 to her friend Ken. Now, Ken loses all the money by investing in hedge funds and on top of that he is laid off by his company.
Frustrated, he goes to Jen and explains the situation. After realizing that there is no way Ken can repay her the loan money, Jen tells him that she has forgiven the loan amount and he need not repay her. This implies that Jen has waived off Ken’s loan.
The following are the key differences between loan write-off and loan waive-off:
|Loan Write-Off||Loan Waive-Off|
|It means the loan still stays in the account and will be reclaimed in the future and is only written off to clean the balance sheet.||It means there is a complete cancellation of the loan and the borrower is no longer obligated to any debt.|
|The loan is legally open and the lender can recover the amount with the help of a legal entity.||The financial institution cannot take a legal course once the loan is waived off.|
|Until the borrower makes the repayment, all collateral the borrower provides will either be confiscated or sold at an auction to recoup the loan balance.||If the borrower had offered collateral for the loan, the ownership papers will be returned to them.|
|Lending institutions frequently engage in this practice on their own.||Lenders carry out this task voluntarily with the assistance of the government.|
The following are the key advantages of a loan write-off:
Loan waive-off is primarily a restricting provision. This is typically offered to farmers who have experienced trying circumstances such as a bad monsoon, unusual weather, floods, earthquakes, or other natural calamities that may have harmed their agricultural produce and left them unable to repay the debt.
Loan waivers relieve farmers of their financial burden of debt repayment under circumstances like these that are beyond their control. In India, the government typically calls for loan waivers for funding to important sectors like agriculture.
In the world of lending, loan write-off and loan waive-off are used quite often. Although the two terms may seem confusing at first, the biggest difference is that after a loan waive-off, the chances of repayment are zero whereas after writing off loans, the borrower is still obligated to pay. Loan waivers and write-offs always refer to the future standing of defaulted loans. In the case of lenders writing off loans, legal action can always be taken. To keep your financial state stress-free and avoid legal hassles, it is better to take out a loan that you are confident you can repay.
Ans: When a lender writes off a loan, it doesn’t mean they can’t collect it through legal channels. It merely serves to demonstrate that the borrower is not currently repaying the lender for the loan and that there is a chance that they will repay it in the future.
Lenders are eligible to deduct loan losses from their taxes. Although it is officially removed from the books of accounts, the lender is still legally entitled to request that the borrower pay back the loan and generate revenue.
Ans: Unsecured debt is debt that does not have collateral attached to it. Since creditors are not obliged to forgive your debts, you might have to attempt signing up for a debt settlement programme to get your debts forgiven. Depending on your financial position, you may or may not be able to qualify for some of the debt relief options available.
You should understand your financial standing properly before choosing a debt solution as some of them can make you end up in a worse situation than you already are.
Ans: Typically, banks maintain the record for bad loans for five years but this might change across regions and specific rules.
Ans: Borrowers who have neglected to pay back debt may still have it appear on their credit records. Additionally, it significantly lowers one’s credit score.
Ans: Yes. banks can write off your personal loans. However, it is important to understand that this has far-reaching implications. Firstly, it will reduce your creditworthiness and you are most likely not going to receive a loan or credit again. Second, your credit score will drop significantly.
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