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How Loan Settlements Ruin your CIBIL Score?

When you take a loan, you may plan to repay the loan after a certain period of time. But what if your find yourself in a situation where you are no longer working and unable to meet your repayment commitment. You may think of approaching your bank or the lender where there is possibility that they might offer you a choice of One-Time settlement (OTS). Here, you most probably would grab this opportunityand take this offer up, however, little did you know, it might take a toll on your CIBIL Score.

What Banks do if Borrower Fails to Repay the Loan?

In case the borrower fails to pay loan for a time frame of six or more months, there is a probability that the bank may offer an OTS (One-Time settlement) in a genuine cases. It can consider cases such as an accident, job loss, any serious medical condition etc. Considering a genuine case, the bank may sit across the table with the borrower, weigh up his situation and agree to ‘write off’ the differentialamount which comes between the amount that has been paid and the amount that is due. Although, the borrower may heave a sigh of relief, as he/shemight not have the recovery agents after him, but the fact remains universal that he/she may have to bear losses for it in the future. Chances could be higher of Banks and lenders declining him loan in the future.

Impact of loan settlement on CIBIL score

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.

FAQs on How Loan Settlements Affect CIBIL Score

How long does it take to recover from a settlement on your loan?

To recover from your loan settlement, it may take more than 6 months.

How long does the settlement stay on the credit report and CIBIL score?

Settling your loan instead of paying will stay on your CIBIL report typically for seven years. This means you may not get loan in the time span of 7 years.

How does settlement affect your CIBIL score?

Settlement affects your credit score as much as going bankrupt. Your CIBIL score will surely dip if you go ahead for settlement or skip your payments.