How one-time Loan settlement can impact credit score in India?

Know why Loan Settlement is a bad idea!

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Know why Loan Settlement is a bad idea!

Praveen Sharma
Tuesday, January 22, 2019

When applying for a loan, you might have planned out your repayment for a certain period. But sometime later, due to unforeseen circumstances, you might find yourself in a situation that you are unable to meet the planned repayment commitment. In order to find a solution, you go to your bank or lender with your issue and they might offer you the option of One Time Settlement. While it seems like a favor to you and you would like to jump at it and take it up, stop yourself. You might be able to put off the problem for now, but it will affect your CIBIL score for loan in the long term. Read on to find out it's impact and how to improve cibil score.

How Loan Settlement works

Continue Reading: How to check credit score online

If the borrower is genuinely facing issues and is finding it difficult to meet the repayment, the lender or the bank offers the borrower the option of One Time Settlement of the loan. This choice is offered to the borrower on completion of 6 months of non-payment of dues. The lenders will take into consideration factors such as job loss if the borrower has met with an accident or has a grave medical condition. The lenders meet with the borrower and analyze his situation and determine the genuineness of his problem. If there are honest concerns on part of the borrower, they decide to write off the difference between the amount that has been paid and the amount that is due.

Under One Time Settlement, the lender reports a loss and the borrower is absolved of his obligations. While it may appear to the borrower a sign of relief, it is not. Even though he won’t be in the list of the recovery agents, he will have to pay a hefty price in the form of a ruined CIBIL score for loan in the long term.

Why Loan settlement ruins CIBIL score

When a bank or a lender writes off a loan, they have to report it to CIBIL. Even though the relationship between the bank or the lender and the borrower has effectively concluded, CIBIL will not take that into consideration while computing the CIBIL score for loan. Instead of closing the transaction, they refer to it as settled. When a loan is referred to as settled, it is perceived as a negative credit behavior on part of the borrower and their credit score might drop by 75-100 points.

What is worse is that CIBIL holds this record for over 7 years. Thus, if the borrower has to apply for a loan during this period, it is likely that the lenders will be doubtful of the borrower. They might want to stay away from giving the borrower any loan. The banks and lenders largely look for the borrower’s repayment history before considering offering him a loan. So if the borrower’s credit report has the mention of a settlement, he will have a lower CIBIL score for loan and the banks and lenders will reject the application.

So, if you are a borrower who is facing difficulty repaying your loan due to reasons like unemployment, or if you have met with an accident or suffering from a grave medical condition, do not resolve to the option of One Time Settlement that your lender or the bank might offer you. Remember that the settlement will lower your CIBIL score for loan. See if you can liquidate a part of your portfolio or any asset to pay off your loan. If you are not in a position to do that, try reaching out to your family and friends. Try to avoid a One Time Settlement by all means.

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