Loan Settlement

Loan Settlement is the process of resolving an outstanding loan by accepting a repayment amount that may differ from the total amount due, based on an agreement between the lender and the borrower. Settlements are commonly used when borrowers face financial difficulties and cannot repay the full outstanding balance.

Frappe Lending supports Full Settlement, Partial Settlement, and Write Off Settlement, allowing lenders to manage negotiated recoveries while maintaining accurate accounting and repayment records.

Did You Know?

Settlement repayments follow a dedicated Settlement Collection Offset Sequence, ensuring collections are allocated consistently across principal, interest, penalties, and charges.

Accessing Loan Settlement

Loan settlements are processed through the Loan Repayment module.

Home > Lending > Disbursement and Repayment > Loan Repayment

Creating a Loan Settlement

Follow these steps to record a settlement:

Open the Loan Repayment list.
Click Add Loan Repayment.
Select the Loan Account.
Choose the appropriate Repayment Type:
- Full Settlement
- Partial Settlement
- Write Off Settlement
Enter the settlement amount.
Save and Submit the repayment.

Settlement Types

Settlement Type	Description
Full Settlement	Used when the borrower and lender agree to settle the entire loan in a single settlement transaction, allowing the loan to be closed.
Partial Settlement	Used when only part of the negotiated settlement amount is collected, while additional settlement collections may follow later.
Write Off Settlement	Used to recover money from loans that have already been written off. This is different from settling an active loan.

Settlement Collection Allocation

During settlement, payments are allocated according to the configured Settlement Collection Offset Sequence. This determines how amounts are distributed across loan components such as principal, interest, penalties, and charges.

Note

The settlement offset sequence is taken from the Loan Product. If it is not configured there, Frappe Lending automatically uses the Company-level Settlement Collection Offset Sequence.

Settlement Validations

Frappe Lending performs several checks before allowing a settlement to ensure compliance with lending policies.

Validation	Description
Backdated Settlement	Full Settlement cannot be posted with a value date earlier than the latest repayment date for the loan, or the latest disbursement in Line of Credit loans.
Post-settlement Entries	After a Full Settlement, only Interest, Penalty, or Charges Waiver entries are permitted.
Write Off Settlement	Write Off Recovery and Write Off Settlement are allowed only for loans already in the written-off lifecycle.

Line of Credit (LoC) Settlement

For Line of Credit loans, settlement entries can be linked to individual disbursements. Validation, repayment schedule updates, and settlement checks are performed at the selected disbursement level whenever applicable.

Auto-close During Settlement

When a settlement is submitted, Frappe Lending evaluates the remaining balance against Loan Product settings such as the Auto Write Off Amount and Excess Amount Acceptance Limit.

If the configured conditions are satisfied, the system can automatically complete the settlement process and update the loan status to Settled or Closed, depending on the loan state.

Write-off Recovery Allocation

For Write Off Recovery and Write Off Settlement transactions, repayment allocation considers previously waived amounts and accrued pending components to ensure accurate recovery accounting and financial reporting.

Best Practices

Configure Settlement Collection Offset Sequences before processing settlements.
Use Full Settlement only when the loan is intended to be completely resolved.
Use Write Off Settlement exclusively for loans that have already been written off.
Verify settlement value dates to avoid backdated validation errors.
Review auto-close settings in the Loan Product to ensure settlement behavior matches business policies.

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