Does Loan Settlement Impact Your CIBIL Score?

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Will a Loan Settlement Ruin my CIBIL Score_WC

4 min 21 Mar 2023

Highlights:

Loan Settlement: Meaning
How Does a Loan Settlement Affect CIBIL Score?
How to Improve Your CIBIL Score after Loan Settlement?

What does Loan Settlement Mean?

Settling a loan can refer to the agreement between the borrower and the lender to settle the outstanding balance for a loan that is less than the original repayment amount.

In such a case, the borrower and the lender negotiate a reduced amount to settle the loan, often as a lump sum, to consider it paid in full. While this may be the route out of necessity for certain borrowers, all borrowers should understand that such acts of distress closure can have a signficant negative impact on their CIBIL scores and may be viewed less favourably by future creditors.

Impact of Loan Settlement on Your CIBIL Score

Settling a loan can have a negative impact on your CIBIL score. When you settle a loan, it means that you and the lender have reached an agreement to close the loan for an amount less than the total outstanding balance. This reflects poorly on your credit score because it signals to future lenders that you did not fully meet your original repayment obligations and often dampens your chances of securing other loans in the future.

It's essential to explore alternative options, such as restructuring the loan or working with the lender to establish a more manageable repayment plan, before opting for loan settlement to minimise the impact on your creditworthiness.

Also Read: Tips to Increase Your CIBIL Score Above 800

How to Improve CIBIL Score after Loan Settlement?

Borrowers who opted to settle their loan may consider some of the steps offered below to reverse the negative impact on their current CIBIL scores:

1. Make timely repayments
2. Avoid opening multiple credit accounts
3. Practice financial discipline

Also Read: Importance of CIBIL Score & Tips To Improve It

Key Differences between Loan Settlement and Loan Closure

Loan Settlement	Loan Closure
Occurs when a borrower negotiates with the lender to pay a lump sum amount that is less than the balance loan amount to settle the loan	Refers to the full repayment of the loan, including principal and interest, as per the agreed terms and conditions of the loan agreement
It can negatively affect credit scores, as it reflects partial repayment	It can positively affect credit scores, indicating full repayment
It is marked as "Settled" on the credit report	It is marked as “Closed” on the credit report
Can reduce the chances of approval for future loans	Can increase eligibility for future loan approvals

Can Settling a Loan Affect My CIBIL Score?

Frequently Asked Questions

Yes, you can receive an NOC letter after you have repaid the loan amount.

Yes, you can get a loan after settlement. However, one should be aware of the eligibility criteria set by the lender to ensure you are creditworthy. The criteria may include your source of income, credit score, etc.

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