Side Effects Of Loan/Debt Settlement On Your Credit Score

When you take a loan, you plan to pay its EMIs on a timely basis. But it might so happen that due to some unplanned events, you may have to settle the loan or debt outside of the earlier agreement. Even though the loan settlement eliminates outstanding obligations, it will have an impact on your credit score.

Whenever there is a loan settlement, it is reflected in the credit report as ‘settled’ and not as ‘closed’. The word ‘settled’ reflects that you were unable to repay the full amount of loan and you paid off the debt with an amount lower than the outstanding amount. Unlike a closed account, a settled account results in a plunge in the CIBIL score or credit score.

A one-time settlement of a loan between the lender and the borrower implies that the borrower is incapable of paying the full amount of the loan in the stipulated time. This can lower the credit score of the borrower and can remain in the credit report for the next few years. Since the borrower now becomes a risky, it becomes tough to get loans approve in the future or will get a loan with a high rate of interest.

Some Important Aspects Of Loan Settlement

Any loan that is due for more than 90 days is classified as a non-performing asset by the bank. The bank writes off the loan which due for 180-270 days after its payment date. A loan settlement can happen before or after the write-off. If it happens before the write-off, the credit report will be updated as ‘settled’. In case it happens after the write-off, the credit report will be updated as ‘post-write-off settled’.

When To Consider Loan Settlement

You may be tempted to settle a loan as it is an opportunity to pay less for the closure of a loan account. It might also relieve you from the outstanding obligation, but you should consider settling your loan once you have made sure that there are no other ways you can repay your loan. This includes

• Spending your savings and investments like fixed deposits
• Liquidating any other asset like property, jewellery etc.
• Borrowing from family or friends
• Asking the bank to extend the repayment period or waive off the interest for a specific time frame
• Have a collateral against the loan at the time of availing a loan even if the bank does not require the collateral
• Opt for insurance on your loan especially if it is a huge amount. The insurance will take care of making the timely payments till the time you are capable of making the repayments.

Loan settlement should be your last option to navigate you through your current loan obligation.

Can I Get A Loan After A Loan Settlement?

Once you have settled a loan, it is a negative for your credit score. Your credit report will have status updated as ‘settled’. This will make it tough for you to get loan approvals in the future. Some banks may consider giving you loans with a higher rate of interest.

Conclusion

Although, loan settlement may seem to be a lucrative offer at the time of financial crisis but it should be the last option. It leaves a negative impact on your credit score and makes it fall by a lot. The credit report will have the status as ‘settled’ for next seven years. This will result in getting the loans in future difficult or with a higher rate of interest.

As a borrower you should ensure that you always choose a reputed lender like IIFL Finance. Doing this will not only get you the best deal possible in terms of the interest rates and other costs, but also when it comes to repaying your loan. IIFL Finance makes the entire process—from application to repayment—a hassle-free affair for the borrower.