Question

Assuming the borrower is in no danger of default, under what conditions might a lender be willing to accept a lesser amount from a borrower than the outstanding balance of a loan and still consider the loan paid in full?

Answer 1

Usually the bank would want that payment of the loan is done on the form of interest and principal on a monthly and yearly basis. This is because banks earn interest on such loan and this is their income. However, there are cases when a bank can accept a lesser amount than the current outstanding balance for discharge of a loan, despite no danger of default from the side of the borrower. Some of these conditions are as follows:

• When the future economic condition does not seems to be favorable which can affect the capacity to pay of the borrower in future. However, such is not the case currently, but this can be the case in future, if bank is aware of any economic and financial risk going ahead.
• When the loan is disbursed on floating rate, and it is expected that interest rate will go down sharply in the future, resulting in loss of interest for the bank. In this case, under the rule of present value of money, the bank would be happy to get a lesser amount currently then to receive higher in future because the present value of future payment will be the same due to low or negative real interest growth.
• When banks would be in a liquidity crunch, it would be ready to accept the payments in less to meet out its operational needs.
• To maintain and build a better relationship with its customers.