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Difference Between Loan Write-Off And Loan Waive-Off

Difference Between Loan Write-Off And Loan Waive-Off

When dealing with debt management, individuals often face complex concepts and confusing terms, such as loan write off vs waive off. When an individual is unable to repay their loan, lenders label it a “Non-Performing Asset” or bad loan. Lenders can deal with NPAs in one of two ways, they can either be written off or waived off. 

While these terms may sound similar, they often refer to two distinct processes with different outcomes for lenders and borrowers. Put briefly, with a loan write-off, the lender believes the loan cannot be recovered and removes it from their books, marking it as a loss. With loan waive-offs,  the lender forgives the loan, and the borrower is not required to repay it. 

In this article, we take an in-depth look at the difference between write-offs and waive-offs in loans.

Loan Write-off Vs Loan Waive-Off

Now that you know what they are, it’s time to understand the difference between the loan write-offs and waive-offs. 

Differentiating ParameterLoan Write-OffLoan Waive-Off
RepaymentA lender writes off a loan to equalise their balance sheets. It does not mean the loan is cancelled. The loan account is active, and lenders hope to make a recovery at a later date. Here, a lender gives up all claims to a loan amount. It is a complete cancellation of a loan. This means the borrower is free from their debt.
RecoveryWhat happens when a loan is written off is that lenders may pursue recovery with the help of a legal entity. They can do this since the loan is not closed.Lenders cannot pursue the loan amount once it’s waived off. They cannot seek assistance from any legal entities or third-party recovery agents to collect outstanding funds. In this case, the loan is closed.
CollateralA lender has the legal right to retain any collateral pledged by the buyer. They are allowed to auction the collateral to recover the outstanding loan amount.A waived-off loan means that the lender must return any collateral pledged by the borrower at the time of taking the loan. 
EligibilityFinancial institutions write off loans to clean up their balance sheets and optimise tax liabilities. Hence, all borrowers come under its purview. A loan waive-off facility is mainly provided to farmers to help them during natural calamities that are impossible to deal with.
CompulsionIt’s mandatory for financial institutions to write off loans to keep their books and ledgers balanced and in check.Borrowers cannot submit requests to waive-off loans. This is a voluntary activity from the lender’s end with the government’s support.

What is a Loan Write-Off?

A loan write-off refers to any amount a lending institution “writes off,” even if the whole loan isn’t cleared. This helps lenders balance their books. 

For example, Mr. Mehta takes a loan of Rs. 10 lakhs for 3 years from Institution A. After 8 months of timely EMIs, he suddenly stops paying. Despite follow-ups and legal attempts, he doesn’t repay. Institution A then reduces the loan’s value, hoping he’ll repay at least part of it. This reduction in value is called a loan write-off.  

Benefits of a Loan Write-Off

A loan write-off benefits the lender in the following ways-

  • Lenders can reduce their tax obligation on the total loan value after it is written off.
  • Lenders can remove non-performing assets and maintain a clean balance sheet.
  • In many cases, borrowers do not use their entire credit limit. They only borrow the required amount and pay interest on it. After the loan write-off, lenders can use the funds initially blocked for the borrower for their own business operations and expansion.
  • A loan write-off does not mean borrowers don’t need to repay the loan. Lenders can continue pursuing the loan repayment, which, if received after the write-off, can be considered a profit in the year of repayment.

Reasons for the Loan Write-Off

There are many reasons for a loan write-off, such as: 

  • If an individual doesn’t make timely repayments
  • If a borrower declares bankruptcy
  • If a borrower passes away, and their estate cannot cover the debt
  • If the value of the collateral provided drops below the loan amount

Impact of a Loan Write-Off

A loan write-off can have significant impacts. Being written off means the loan can no longer be an asset, and the lending institution can reduce its NPAs on its records. A loan write-off can also lessen the lending institution’s tax liability. 

What is a Loan Waive-Off?

To understand the difference between a write-off vs. a waive-off, it is first essential to understand what a waive-off is. A loan waive-off is when a lender forgives a part or the entirety of the borrower’s loan. For example, Mr Chaudhary borrowed a personal loan of Rs 5 lakhs for 2 years. However, he ultimately had to declare bankruptcy. His inability to repay the loan leads the lending institution to waive off his loan, meaning his debt is forgiven. However, this only happens in exceptional circumstances. 

Benefits of Loan Waive-Off 

A loan waive-off can have significant impacts on the lender and borrower. While the lender faces substantial losses, it greatly benefits the borrower in many ways. These include:

  • Financial respite: When a loan is waived, the borrower is no longer required to pay off their debt. This can offer them enormous financial respite. It allows the borrower to focus their spending on necessities (whether that is housing, medical expenses, or other reasons). 
  • Impact on credit score: When a lending institution waives off a borrower’s loan, it can positively impact their credit score, improving their future creditworthiness. Farmers and other individuals in the agricultural sector are often offered this provision. 

Reasons for Loan Waive-Off

There are many reasons why a lending institution may offer a loan waive-off, including: 

  • Financial difficulties
  • Natural calamities
  • Loss of or decrease in the value of collateral
  • Alterations in loan terms
  • Government policies

Impact of a Loan Waive-Off

The impacts of a loan waive-off include:

  • The account is closed 
  • Lenders cannot take legal measures to get the loan amount back 
  • It minimises tax liabilities 
  • The borrower’s credit score improves 

Get a Personal Loan at Tata Capital

Are you looking for a personal loan? Consider Tata Capital – we offer numerous attractive features and benefits. These include: 

  • Multipurpose loans: You can apply for Tata Capital’s Personal Loan offerings for any occasion or reason. This includes travel, wedding expenses, higher education, home renovations, and more! 
  • No security or collateral required: Tata Capital’s personal loan is unsecured, meaning borrowers are not required to pledge assets or provide securities. 
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  • Flexible tenure: We offer repayment tenures of up to 6 years, allowing borrowers control over their EMI options. 

Conclusion

Loan write-offs vs. waive-offs take place under different circumstances. While the former is a mandatory practice, the latter is at the discretion of the government and the lender. To avoid either of the situations, it is best to calculate the amount you can repay with the help of a personal loan calculator.

Are you looking for a personal loan? If yes, then partner with Tata Capital. We extend personal loans at affordable interest rates, extended repayment tenures, speedy processing and minimal documentation.

You can apply for a personal loan online and track its status on our web portal or on our personal loan app. To know more, visit our website or give us a call today!

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FAQs

What happens if my loan is written off?

A loan write-off simply means the lender considers the loan a loss and accepts that it is unlikely to recover the loan. They write it off from the balance sheet to equalise it. However, it does not mean the loan is cancelled, and you are still obligated to repay it.

How does a loan write-off affect my credit score?

A loan write-off negatively impacts your credit score, indicating non-repayment, which can affect future loan approvals.

What are the common reasons for a loan waiver?

Loan waivers are usually granted due to economic hardships, natural disasters, or government policies aimed at easing borrowers' financial burdens.

What are the tax implications of a loan write-off or waiver?

Loan waivers and write-offs reduce the tax liabilities of the lender.

Can a loan be written off and waived at the same time?

No, loans cannot be written off and waived off at the same time. A loan write-off removes the loan from the lending institution’s balance sheets. On the other hand, a loan waive-off is when the lender decides to forgive the loan partially or entirely, meaning the borrower’s debt is cleared. 

Can a borrower request a loan waiver?

Borrowers do have the option to request a loan waiver. However, approval is usually granted only under specific circumstances. This includes financial struggles, natural disasters, or government programs meant to offer relief to specific sectors. 

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