Highlights:
- What is Loan Settlement?
- What is CIBIL Score and How Does a Loan Settlement Affect Your 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.
What is the Impact on Your CIBIL Score when You Settle a Loan?
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 minimize the impact on your creditworthiness.
Also Read: Does Settlement of an Education Loan Impact the CIBIL Score?
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
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