How to Improve CIBIL Score after Education Loan Settlement

Settling an education loan, while it may provide temporary relief, can leave a lasting mark on your credit report and CIBIL score for a longer period of time. This step, while reducing immediate financial strain, could potentially impact future borrowing capabilities and financial opportunities, lower the CIBIL score and lower the chances of your financial standing in the market.

Professional TIP : The settlement should be the last choice. Exploring repayment plans, restructuring, or delay with the lender might help avoid settlement and its consequences.

However, there exist effective strategies to overcome the after-math of an education loan settlement and rebuild a stronger credit profile from scratch to understand what those strategies are and how they work. Read this blog till the end.

What is CIBIL Score?

The CIBIL score is a three-digit numeric summary of a consumer's credit history and also it is the reflection of the person's credit profile.

This is based on past credit behavior, such as borrowing and repayment habits as shared by banks and any financial institutions, whereas the ideal score is considered to be in between 700 to 900 and the moderate or lowest credit score begins from 300 to 500.

What is Education Loan Settlement?

Education loan settlement indicates an arrangement made between a borrower and a lender ( Lender here means a financial institution or bank) to resolve an education loan that the borrower is unable to repay in full according to the original terms.

What are the Benefits of Education Loan Settlement?

1. Reduced Debt Burden: The primary benefit of education loan settlement is that it can reduce the financial pressure on borrowers who are struggling to repay their loans instantly.

   By negotiating a settlement, borrowers might pay a reduced amount compared to the total outstanding balance, easing their immediate financial burden.

2. Offers flexibility of negotiation: Borrowers have the opportunity to negotiate and put forward their concerns and terms with the lender, potentially allowing for a more manageable payment plan or a reduced decided amount to settle the debt.

3. Full stop on collection calls : Once you clear out all the debts while settling down the loan, there will be no any collection or debt collection calls.

4. Offers peace of mind : When you pay off the debt, it comes with relief and a peace of mind that leads to a healthy well being.

What is the Education loan settlement process?

• Step 1 : Gathers information

  The borrower needs to gather information before deciding to proceed with the education loan settlement process. As the borrower must have all the necessary information with them at the very beginning.

  The documents such as loan contracts and payment history having a detailed record of your repayment will be very helpful and beneficial. In addition to the above information, the borrower will be asked about their current employment status, sources of income, and outgoings.

  This information allows the borrower to pay the outstanding balance in full, up to the maximum amount that can be repaid.

• Step 2 : Look after legal and financial consultant

  The education loan settlement process will ask for advanced preparation and tactics where a borrower needs to contact a financial advisor or an attorney.

  Keeping in mind the borrower's financial circumstances, a financial advisor or an attorney helps come up with a proven strategy or tactics before approaching the lender or the bank for settlement.

• Step 3 : Connect with the lender

  When you follow a lawyer, they speak honestly on your behalf with the lender or creditor and this thing will also give you a benefit when it comes to the final negotiation.

  Whereas, the borrower needs to describe their financial condition and any issues with making payments at this critical point in the education loan settlement procedure. When communication is transparent, it increases the likelihood that a second favorable settlement agreement will be reached.

• Step 4 : Documentation and negotiation

  The lawyer on behalf of the borrower or the borrower itself then convinces the lender to get into discussions. Negotiation is the process of coming to the same conclusion through communication. During this phase, the borrower mentions their capacity to pay.

  A written agreement comes into the discussion only if the conversation is effective and is in the favor of both the lender and the debtor. This agreement will clarify the state of a fair bargain that was discussed during the negotiation.

• Step 5 : Completing the loan settlement process

  Finalizing the settlement is the next step after discussion and agreement.

  After the borrower and lender agree on a settlement amount, the lender declares a timeframe for the borrower to make the agreed-upon payment, and then the borrower is required to acquire a written confirmation after making the payment that specifies that the debt has been "settled."

How Education Loan Settlement Affects CIBIL Score?

The impact on CIBIL score :

When a bank or lender writes off the debt of the borrower, it will be directly reported to the credit bureau agencies, and the agencies will consider it as a negative point.

Any credit bureau agencies will not consider it as a closed account instead, they will term it as a settled account. When a loan is termed as settled, it will take away a few points from your CIBIL score which is not at all good. The borrower’s credit score will go down by significant points and will stay in the record for years.

And in the same context, if the buyer is planning to take a loan after settlement no lender will grant him/her a loan just because of a negative score and the negative history.

KEEP IN MIND : Education loan settlement looks like a relief from afar for those who are not inclined to pay loans, but the cost they are paying for their unwillingness is way more than anything.

How to Improve CIBIL Score after Education Loan Settlement?

1. Pay off all the dues

   If this is the case that you have several other loans outstanding at the time of debt settlement we still have ways to improve your CIBIL score but the only one condition here will be that whenever your budget allows it, or you receive a good flow of funds, pay off the other debt obligations before their binding due date.

2. Utilize your credit cards smartly

   Credit cards do not hold any interest rate, so chances are you can spend them recklessly, increasing your debt burden. At the same time, if credit card bills are not paid on time, they will incur a monthly interest penalty of around 2% on the unpaid amount. According to credit bureaus, spending more than 30% of your overall credit card limit may create a difficulty when you try to improve your CIBIL score after credit card settlement.

3. Get approval for the secured loan

   Chances are getting an unsecured loan with a loan settlement mark on your credit report is very difficult. But, if you are pledging your assets as collateral and the worth of the asset is equal to or higher than the loan value, you might easily get loan approval.

4. Neglect loan queries

   You have to accept that asking for the loan after the loan settlement is always going to be tough. If a lender rejects your loan application and you immediately re-apply your credit score will suffer even more. So avoid applying for the loans once you receive the rejection after settlement.

FAQ’s :

1. Can I get a loan after an education loan settlement?

   It is possible but it will ask for the time as the record of settlement is included on your credit report for years so an application made after settlement may lead to a rejection.

2. What is a good CIBIL score for an education loan?

   A score typically ranges from 300 to 900 whereas 300 is the lowest or moderate CIBIL score where the rate of interest will be higher and in comparison 700 to 900 is the score where the rate of interest will be lower or very less.

3. What will happen if the education loan is not paid?

   The lender will send legal notices to the borrower if they ignore the notices that have been sent the credit score will also have a big impact.

4. What happens after one time settlement?

   If you enter into a one-time settlement, it conveys that you (the borrower) accept that you are incapable of paying the loan amount in full.

   This information is shared with credit bureaus by the lender and the loan account is shown as “settled” instead of “closed” in your credit report which can lower your credit score.

5. How do I remove a settled account from my credit report?

   The term “ settled” will not be removed from your credit history, further if you want to convert your settled account into a closed one then pay off waived amounts which may include late payment charges and penal interest .

Conclusion

Improving your CIBIL score after settling an education loan requires financial management, timely payments, credit usage, disputing errors on your credit report, and patience, as consistently responsible behavior gradually rebuilds creditworthiness despite the impact of the settlement.