Writing off a borrower’s loan has to be reported to CIBIL Credit Information Bureau (India) Limited [who maintains and collects an individual’s records of payments pertaining to loans and credit cards]. Even if the relationship between bank (lender) and borrower may have been terminated, this transaction is not recorded as ‘closure’ but as ‘settled’ in its records. However, this behavior is considered as negative credit behavior and there is possibility that you’re CIBIL score may drop as much as 75-100 points because of ‘settled loan’.
Besides, this record remains with your CIBIL report for as long as 7 years. Which, in turn, adversely affects the borrower in case he/she has to apply for loan anytime in the seven years. Most of the lenders will be wary to lend you a loan and banks may straight away reject your loan application in case your credit report is pulled to check your worthiness.
What happens after loan settlement is done?
Once the loan is settled, the CIBIL report would tag your loan as ‘settled’. When this loan is settled, it means that the credit institution is ok to accept the offered amount which is less than the actual amount. Since the bank/lender has taken a loss, the status ‘settled’ will be considered negative and chances of denial of loan application in future will become higher.
What borrowers can do to not let loan settlement affect the CIBIL Score?
In case a borrower is genuinely struggling to repay a debt and does not know what to do,the first thing he/she has to do is to not jump on the settlement opportunity. Instead you can dissolve some assets or a part of your portfolio to repay the loan amount. However, even if this does not work out, you can reach for help from your friends and family. Here, the important thing is to basically avoid ‘settlement’ as it is not easy or the only way out.
Since life is unpredictable, and if all doors close for help,you will have to agree on settlement. But, not before trying one last thing settlement option i.e.to try and negotiate with your bank on easier payment terms such as a waiver of the interest component or the extension of the repayment tenure, for some time.
Lack of awareness
In most cases, borrowers are bogged down by debt and hence grab on the OTS (one-time settlement) opportunity. However, they are unaware that they might have to face the grunts elsewhere(in terms of not getting loan in future, after the account is settled).
Take away: A ‘settled’ account will do more damage to your credit history then what you can imagine!
Always be clear on where you stand
Whatsoever your decision maybe, it is imperative for you to check your CIBIL score post your agreement with your lender, to see where you stand. And once you know your CIBIL score, you can concentrate to put all efforts in maintaining an impeccable credit behavior as well as in repaying all other loans. This may not clear your impression,but surely help you to improve your CIBIL score gradually over a period of 12-24 months.
Therefore, it can be concluded that loan settlement is not a great idea as you may have to face repercussions of it later.
