Types

• A settlement loan serves to payoff an existing debt, typically at a portion of the cost. For example, if you owe $8,000 on your current car, but cannot afford to repay this sum, you may offer your lender $4,000. If the lender accepts, you can take a settlement loan for $4,000 and begin repaying the new lender on this smaller principal. The majority of settlement loans are made by private lenders, and they are conventional loans as a result.
  
  

Features

• Settlement loans aim to reduce the burden of debt on a lender. They are usually considered a last-chance effort to avoid default. When you take a settlement loan, there may be consequences to your credit. Further, you will still owe money to the new settlement lender, often at a higher interest rate than you were paying on the previous loan. The advantage is strictly a lower loan payment each month.
  
  

Misconceptions

• Settlement loans will rarely be backed by any federal agency or organization. With the absence of government backing, these loans will always be considered conventional. It is important not to confuse the term "conventional" with the term "conforming." A conforming loan meets the federal regulations suggested to the lending industry, such as applicable limits and interest rates. It is very possible for a loan to be conventional, i.e., made by a private lender, but be nonconforming.
  
  

Significance

• When you are looking for loan options, it is important to understand the terminology used to sway your decision. Lenders may use the word "conventional" to make you think their loans follow regulations or restrictions. In reality, adjustable rate loans, jumbo loans and high interest settlement loans may all be termed "conventional."
  
  

Exceptions

• There are rare exceptions when a settlement loan may also be a conventional loan. These exceptions occur when a federal agency, such as the Department of Veterans Affairs or Federal Housing Agency, issue loan guarantees on loan refinancing or settlement. These organizations may assist the lender in reissuing a loan to settle a previous debt. In this case, the settlement loan would not be conventional.