Does debt settlement work for personal loans?

Yes, personal loans can be settled, but they're generally harder to settle than credit card debt. Here's why, and what to expect.

Personal loans are unsecured debt (assuming we're not talking about a secured personal loan backed by collateral), which means they qualify for settlement programs. The creditor can't repossess anything if you stop paying. That gives you some leverage in negotiations. But personal loan lenders tend to be more aggressive about collecting than credit card companies, partly because the loan amounts are often larger and partly because the terms were more structured from the start.

Typical settlement ranges: Personal loans from banks and credit unions usually settle for 40% to 60% of the outstanding balance. Online lenders like LendingClub, Prosper, or Upstart may settle for slightly less (35% to 55%) because they have lower overhead and can process settlements faster. But every situation is different.

The co-signer problem: A lot of personal loans have co-signers. If yours does, settling the debt doesn't let the co-signer off the hook unless the settlement agreement specifically releases them. Make absolutely sure any settlement offer includes language releasing all parties from the obligation. Get this in writing before you send a penny.

Credit union complications: If your personal loan is with a credit union where you also have a savings or checking account, be careful. Credit unions often have a right of offset, which means they can pull money from your other accounts to cover the delinquent loan. If you plan to stop paying a credit union personal loan, move your other accounts elsewhere first.

Peer-to-peer and online lenders: These companies move fast. Some will charge off the account and sell it to a debt buyer within 90 to 120 days. Once a debt buyer owns the loan, settlements get cheaper because they paid a fraction of the balance. But the debt buyer may also sue quickly.

DIY vs. company: For a single personal loan, you might be better off negotiating directly rather than paying a settlement company's 15% to 25% fee. Call the lender's hardship or loss mitigation department. Explain your situation and ask what settlement options they offer. If you can scrape together a lump sum, you'll typically get better terms than a payment plan.