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, it should be noted that such acts of distress closure can influence their CIBIL scores negatively and may be viewed less favourably by future creditors.
How Does a Lender Process Loan Settlement?
If a borrower has turned delinquent for a time span of six months or more, the lender will presumably offer an OTS (One Time Settlement). The offer for an OTS is subject to the lender being convinced that the non-payment was due to a genuine hardship, such as financial losses in business or serious clinical issues, due to which the income was affected. The lender will define a particular total, so it is easier for the borrower to repay the credit in one go. When the payment is made, the credit line will be closed. However, note that such a settlement will get registered in your credit report, potentially reducing your credit score.
Impact of Loan Settlement on Borrower’s CIBIL Score
Settling a loan can have a negative impact on the borrower’s CIBIL score. When a borrower settles a loan, it means that they and their lender have reached an agreement to close the loan for an amount less than the total outstanding balance. This reflects negatively on their credit score because it indicates that they did not fully meet their original repayment obligations and often reduces their chances of securing loans in the future.
It is 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 Can a Borrower Avoid Loan Settlement?
Borrowers might see 'loan settlement' as a chance to pay slightly less at present, to close their credit account. However, this can lower your credit score for a substantial period. It is advised that loan settlement should only be resorted to when the borrower really does not have another choice. In case the credit amount can be paid by reserve funds or reserve ventures, loan settlement should be avoided.
Another option that the borrower can think about is discussing with your loan specialist to broaden your reimbursement terms. Together the loan specialist (representing the lender) and the borrower can rethink the schedule of repayment and decrease the financial cost of the loan as much as possible. The repayment can also be planned so as to defer the payment of interest amount, as long as possible and to primarily concentrate on repayment of the principal amount.
With the loan specialist, the borrower can try to check the loan progression and plan it out in such a way that the borrower’s credit report and credit score are impacted the least. Yet another financial option is that the borrower can take credit instead of a loan. The loan can be insured so that in case of financial hardship the insurance contract can help with the repayment of the loan. Since technically the repayment of the instalments will not be delayed (that is they will be paid by the credit insurance on time), the credit score of the borrower will not be impacted.
What Should a Borrower Keep in Mind?
Borrowers should only avail of a loan or credit that they can repay comfortably and on time. Commitment/Credit reimbursement can appear to be a viable option for the borrower when the borrower cannot repay the instalments on time. The borrower should always remember that this option will always unfavourably impact their credit score. They should only go for this option when they are left with no other financial options.
What to Ask before Settling a Loan Account?
Before the borrower proceeds to settle the loan, they should request that the loan specialist closes the record (as opposed to settling it). Some lenders might offer exits to regular customers in times of financial stress.
Additionally, borrowers should have evidence of the last instalment paid prior to closing the record. Request a 'no-contribution declaration' from the loan specialist. This will assist them with questioning any mistakes on the credit report filed by the loan specialist.
Also Read: How to Remove a Settlement from My Credit Report?
How to Improve CIBIL Score after Loan Settlement?
Borrowers who opted to settle their loan may consider some of the steps offered below to improve their current CIBIL scores:
- Make timely repayments
- Practice financial discipline
- Clear all pending financial obligations
- Manage credit cards and use them only when essential
- Apply for a secured and insured credit line
- Utilise credit carefully and keep the credit utilisation ratio low
- Try avoiding unnecessary hard credit inquiries
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 |
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.
Loan settlement should only be considered as a last resort when you are unable to repay the loan through other means. While it provides a way to close the credit account, it negatively impacts your credit score and is viewed unfavourably by future lenders.
No, settling a loan typically impacts your CIBIL score negatively because it indicates partial repayment rather than full repayment as per the original loan terms.
Yes, closing a loan positively affects your CIBIL score, provided it is marked as ‘Closed’ rather than ‘Settled.’
A loan settlement remains on your CIBIL credit report for up to seven years.
DISCLAIMER:
While care is taken to update the information, products, and services included in or available on our website and related platforms/websites, there may be inadvertent errors or delays in updating the information. The material contained in this website and on associated web pages, is for reference and general information purposes, and the details mentioned in the respective product/service document shall prevail in case of any inconsistency. Users should seek professional advice before acting on the basis of the information contained herein. Please take an informed decision with respect to any product or service after going through the relevant product/service document and applicable terms and conditions. Neither Bajaj Housing Finance Limited nor any of its agents/associates/affiliates shall be liable for any act or omission of the Users relying on the information contained on this website and on associated web pages. In case any inconsistencies are observed, please click on contact information.
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