Know how Loan Settlement impacts your cibil score improvement

Loan Settlement and Its Underlying Perils on Improving Your Credit Score

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Loan Settlement and Its Underlying Perils on Improving Your Credit Score

Praveen Sharma
Sunday, January 20, 2019

When you take a loan, it always remains on your priority to plan and repays it on schedule, as not doing so thrust a bitter strike on your credit score. But sometimes because of unexpected circumstances, you may find it extremely difficult to pay the EMIs for a few months and fulfill your commitments. This will have an unfavorable impact. Then the question arises - how to improve my cibil score? Approaching your bank or lender and explaining to them about your problem is one way to bail you out of the situation. In such scenarios, they might put forward a one-time loan settlement as a probable choice. At the outset, the idea might seem helpful for you to pitch on. But have you ever thought about how this arrangement can wreak havoc on your credit score?

Continue Reading: How to improve cibil score after default?  

Is a loan settlement really a significant pointer in determining how to improve cibil score after default in India?

The one-time settlement known as OTS in banking parlance allows you to bind yourself into an imbroglio in a nexus with your loan giver. It implies that you are unable to repay the full loan amount. When the bank or the lender writes off a loan, they inform to the credit bureau about your incapability to pay back. The latter in turn will specify the loan as “settled” in your credit report account information section rather than terming it as a closure of the transaction. Consequently, your credit score dwindles by 75-100 points.

In the account information section, a subsection referred to as Days Past Dues (DPD) records your repayment conduct over the past 3 years on a monthly periodicity. If the DPD shows “o” it signifies prevalence of no dues. Anything other than “o” implies a negative connotation on the borrower’s creditworthiness. Therefore, to improve credit score, making an exertion to let your DPD reach “o” is key.

Any loan that’s unpaid for more than 3 months is deemed a non-performing asset by the bank. And post 6 to 9 months of the payment date, the loan gets written off. Loan settlement can transpire pre or post-write-off. If the settlement happens prior to the write-off, the credit report will update the loan as “settled”. On the contrary, if the settlement occurs after write-off, the loan is remarked “post-write-off settled”. Amidst both the scenarios, your credit score nosedives.

You must be cognizant of the fact that the “settled” status holds on to your credit report for the next 7 years. Over this period, the lenders are on the alert and steer clear of dispensing any loan to the borrower. Therefore, it becomes impossible for you to acquire a loan during this tenure.

What should you do to avoid a loan settlement?

If you as a borrower are eager to know about how to improve your credit score make certain that you unquestionably avoid a loan settlement. Situations unthought-of, such as sudden unemployment, an accident or the inception of a life-threatening medical condition can make your loan repayment agenda too hard-pressed. However, don’t jump at OTS offer which the bank or lender comes up with. Instead, try to look on liquidating a portion of your portfolio or some asset to recompense the loan. If you’re still lacking the ability to pay off your loan seek help from your family and friends.

It’s recommended that you keep a contingency plan in place to fall back on. See to it that you’ve got collateral which you can grant and mortgage to the bank if the situation demands and even if the bank doesn’t ask you to declare collateral against the loan.

Another decent option is to go for insurance on your loan amount as a guarantee, especially if it’s a big amount. In case, you face troubles making the payments, the insurance will secure the release of your loan repayment. In this way, you won’t fail to pay and spare your name from getting blacklisted in the credit report.

If there’s absolutely no option that can come to your succor, keep loan settlement as your final recourse. But not before talking to your lender, either to increase your repayment period, offer you an affordable repayment term or an interest waiver for a certain period. At long last, if you’ve gone ahead with a settlement, ensure that your lender certifies you’ve got no pending dues with them. This will prevent any interest from getting accrued against the overdue settlement amount.

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