Does Loan Settlement Ruin CIBIL Score?
Although settling the loan account will ease your monthly EMI woes, poor credit score would still stay for a long to haunt you. Read to know if loan settlement ruins your cibil score!
Life can be full of uncertainties. A job loss or lack of adequate savings to cover the monthly expenses can add to the quandary. What can make matters worse is if an individual going through financial hardships also needs to make regular loan repayments. In such situations, the first step is to inform the lender of the situation and request for some additional time to clear off the outstanding dues.
If the lender is convinced of the genuineness of the situation, then loan settlement is an option to get out of the debt. A loan settlement is essentially an agreement between a borrower and the lender wherein the borrower ‘settles’ the loan by paying a part of the loan and the lender forgives the remaining part of the loan. Depending on the situation, the lender may ask borrowers to settle the loan by paying up to 50% of the total amount.
Most lenders initially offer a six-month non-repayment period in case of delays or defaults in paying back the dues. If the borrower fails to make payments for six months, then depending on the situation, lenders may write off the difference between the amount that has been paid and the amount that is due.
Most lenders consider cases such as an accident, job loss, any serious medical condition etc. for one-time settlement. Lenders usually check to what extent the loan can be paid by the borrower and only then finalize the amount that should be written-off.
As opposed to the ‘closed’ status of a borrower who has completely cleared the dues, the status of this loan is marked as ‘settled’. Loan settlement can come as a great relief to borrowers but it has an adverse impact on the credit score.
Impact Of Loan Settlement On Credit Score
A ‘settled’ loan is identified as negative behaviour by credit information agencies. This is because the borrower has failed to repay the entire loan amount.
Writing off a borrower’s loan is reported by the banks and NBFCs to the credit information bureaus such as TransUnion CIBIL. Once the loan is settled, the CIBIL report marks the loan account as ‘settled’, resulting in a drop of about 75-100 points in the CIBIL score. Further, this remains recorded in the CIBIL report for as long as seven years.
Borrowers with remarks on credit report showing 'settled' may face challenges while applying for loan anytime during those seven years. Since all lenders check the applicants’ past payment records before sanctioning a new loan, there is a possibility that some lenders may straight away reject the loan application.
How Can Borrowers Deal With The Problem?
Though one-time settlement may seem to be an opportunity to pay a lower amount, borrowers should reconsider their decision of loan settlement and think of options that could possibly help them to clear the total loan amount.
• If possible, borrowers can liquidate their savings or investments to pay off the outstanding loan amount in full. Borrowers can even settle the debt with gold ornaments or a piece of land and even insurance policies. If nothing works, they can seek help from family and friends.
• A good alternative is to request the lender to extend the repayment tenor. This can help borrowers with more time to repay the loan in full. Restructuring the monthly instalment system can also be helpful, as do reduced interest rates. Borrowers having good relation with banks can request to waive the interest component on the loan so as to enable them to clear the principal component on time.
Building Good Credit After Loan SettlementAfter the loan settlement is finalized, borrowers should focus on improving their credit score. It may take a bit of time, say 12 to 24 months. Some of the ways by which borrowers can build a good credit score after a loan settlement are:
• Clear all dues
• Do not make loan enquiries
• Maintain favourable credit utilisation ratio
In most cases, the borrowers are not aware of the implications of one-time settlement. It must be remembered that loan settlement is not a normal loan closure. It is an agreement where the lender after assessing the repayment inability of the borrower ‘settles’ the loan by offering him to repay only a part of the loan.
Borrowers should choose loan settlement only when there is undeniably no other option left. The consequences of a loan settlement are detrimental as it lowers the CIBIL score and is reported in the credit history. A good way to keep the problem at bay is to choose flexible repayment options.
Most banks and NBFCs in India like IIFL Finance offer its customers flexible repayment tenor terms. For a seamless customer experience, IIFL Finance offers easy loan application procedure with minimal paperwork.