Does one time settlement of loan affect CIBIL score?

Life is unpredictable and sometimes, it brings you on the path which was not planned by anyone. You have taken a loan with a certain plan for repayment, but with the changed situation, you find it difficult to meet your repayment commitment. This will definitely impact your credit score negatively and may restrict you from taking loans in future.

But if you approach the bank and inform them about your inability, they might offer you a choice of one-time settlement. The lender or the bank will offer you this option after 6 months of non-payment of dues, only if they find that payment was delayed due to some genuine reasons such as accident, job loss or any serious medical condition. The bank authorities sit down with the borrower and access the genuineness of his situation and the amount due to them. Although you may find it a beneficial option, this settlement can cost you your CIBIL score. Yes, your CIBIL score is affected by this settlement and this settlement is viewed as negative credit behaviour.

If you have settled a loan with your banker or lender, then you should ask for a no-dues certificate from your lender. This will ensure that they are not imposing any interest on the outstanding amount that was not paid for settlement.

  • What a bank does: If the borrower is finding it hard to meet the repayment of loan due to some genuine issue, then the lender or the bank offers the borrower a one-time Settlement of the loan. Bank will consider this option only if they are convinced that the borrower is facing any genuine problem. If the borrowers fail to make payment for six months, the banks or lender will start investigating the reason behind your unwillingness to make payment. Situations such as job loss, accident or medical emergency will be considered genuine reasons. The bank representatives sit with the borrowers and analyse his situation and agree to write off the difference between the amount that has been paid and the amount outstanding towards them. The amount that is outstanding will be written in the loss book of the bank and the borrower will be set free. After this step, recovery agents won’t come to borrower’s home and he will no more receive any recovery calls. The borrower may find this offer quite relieving but its impact on your CIBIL score will let you regret in the future.
  • The impact on CIBIL Score: When a bank or lender writes-off the debt of the borrower, it will be reported to the CIBIL agency and the agency will view it as a negative point. CIBIL will not consider it as closed account; instead they will term it as settled. When a loan is termed as settled, it will subtract a few points from your CIBIL score. The borrower’s credit score will drop by 75-100 points and will hold this record for the next 7 years. So, if the borrower is planning to take a loan during this period, no lender will allow him to do so due to his CIBIL score. The bank or lender takes a look at the borrower’s CIBIL score before offering him a loan and if the past record shows any settlement or non-payment, his loan is likely to get rejected.

This is why a one-time settlement may sound like a relief for those who are not willing to pay loans, but the cost they are paying for their unwillingness is way more than anything. Your credit score helps the lender decide if you are qualified enough for a loan or credit card. As per CIBIL, your credit score ranges from 300 to 900 and those with a score of at least 750 are preferred by lenders. Higher credit scores suggest a lower risk of default and if your credit score is affected due to your non-payment of previous loans, then lenders have full right to reject your loan application.

A loan that is due by more than 90 days is classified as a non-performing asset by the bank or lender and after 180-270 days of the payment due date, the bank will write-off the loan. However, the settlement can happen before or after the write off period. If the settlement had happened before the write-off, the credit report will be updated as “settled”. But if the settlement is made after the write-off, the credit report will be updated as “post-write-off settled”. Under both the conditions, it will impact your credit score and will be considered as a negative aspect by the banks and lenders. They will be reluctant to give you a loan in future. If you approach a bank for a loan, it is highly likely that the loan will get rejected.

  • Lack of awareness: The biggest problem with this settlement is that people are less aware of the details of this settlement. Borrowers regret their decision of settlement later. They do not realise that it damages your credit score more than you can imagine. It makes it hard for the borrower to apply for a loan for the next 7 years as CIBIL will hold this record for that period. Customers must be aware of all the pros and cons related to this settlement and one must do good research and study before opting for this settlement option. Knowledge is the biggest strength that the customers have. So, be well aware of all the consequences and process of settlement to avoid any regrets later. Read all the terms and condition carefully and never forget to consult your agent for any type of queries.
  • Another way out: If, as a borrower, you are facing any problem in repaying your loan due to reasons such as unemployment, accident or any serious medical conditions, do not think that one-time settlement is your first and only option. Treat this offer of your lender as your last option as this is one of the most harmful ways to settle your loan. There are many other options that can bring you out of this dilemma. Ask your family and friends for loan and avoid settlement by repaying the amount. You can even talk to your lender or bank and request them to extend the repayment time limit or waive the interest for a certain period. One must avoid settlement by all means and try their best to repay the loan on time.

The next big thing one can do to avoid settlement is to have a contingency plan while taking a loan. Even if the bank does not require any collateral, you must still always have a backup plan for critical situations. You can even take insurance on your loan amount and the insurance company will carry all your formalities of paying your dues till you are capable to do so.

These options will not stop your payments and hence, your credit score will not get affected. Not only will this help you avoid taking the lender’s option of the one-time settlement, but also help you from CIBIL mentioning this in your Credit report.

The above options will not only help you avoid any negative marking in credit report, but will also help you stay away from all the complicated formalities of banks that are done to find the genuineness of situation. So, choose other possible ways and try to make arrangement on your own as much as possible instead of going for the settlement option to avoid any regrets in future.

Things to remember

Repaying loan is a big responsibility. It is believed that taking a loan is easy, but repaying it is tough. It will not only cost you your money, but peace of mind. Thus, a few things must be remembered before applying for a loan. Always borrow within your limits and as per your requirements. Always make sure that you have an alternate means to repay the loan. The only reason why banks and lenders offer you the option of one-time settlement is because they are aware that you will not be able to return the money and they will settle for whatever you can pay. They will at least get some money from you. Make sure that you never misuse your credit capability. Lastly, remember that the settled status stays in your credit report for the next 7 years, making it impossible for you to get a loan for such period and reducing your credit score by up to 100 points.

One time settlement has a direct impact on your CIBIL score. The CIBIL score of a person is one of the most important things that show your credit status and a red mark on this report card can restrict you from taking a loan for the next seven years. So, think twice before choosing this option of one-time settlement and do good research about every aspect of this settlement.