Does one one-time settlement affect CIBIL’s credit score?

The one-time settlement indicates an inability to repay your loan in full and/or on time and thus, may hurt your CIBIL score.

How long does a loan settlement stay in the CIBIL credit report?

Loan settlement may be present in your credit report for as long as 7 years.

How does credit card settlement affect CIBIL score?

Both loan and credit card settlements show an inability to make your repayments in full and/or on time and harm your CIBIL credit report and credit score which in turn may make it difficult for you to secure credit in future.

Effects of Loan Settlement on Your Credit Score

Finding it hard to repay your loan in time? Thinking of getting a loan/debt settlement from your lender? Before you apply for a loan settlement, know that it can affect your credit score negatively which may decrease your chances of getting a credit card or loan in future. Read on to know how.

Finding it hard to repay your loan in time? Thinking of getting a loan/debt settlement from your lender? Before you...Read more

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Impact of Loan Settlement on Your Credit Score

Most of us try to repay loans or EMI dues in time to not let it impact our credit score negatively. However, sometimes making timely payments may not be possible due to one reason or the other. This can negatively impact your credit score and make it difficult to get your loans approved in the future.

But if you approach your lender, they might offer you to get into a settlement where your bank agrees to accept part payment of the loan and close the loan account. Also, you might be given extra time to repay the mitigated loan amount. Though it may look like a lucrative option to you, such a settlement can unsettle your credit history.

What is Loan Settlement

In case you are unable to make your loan repayments on time or in full due to dire circumstances such as an illness, accident or loss of employment, etc., you may need to request the lender for some extra time to make your repayments or one-time settlement (OTS) option where you and the lender may mutually agree to “settle” the loan. This settlement amount is always less than the entire unpaid loan amount that you owe.

“Loan settlement” helps you clear off your debt, but unlike “loan closure”, hurts your credit score as it shows your inability to repay your debts on time and in full.

Also Know: How to check your credit history for free?

How Does Loan Settlement Work

In case you are unable to repay your debt completely or on time approach the lender for the same. The lender may offer the option to settle your loan depending on the genuineness of the situation. He may offer a 6-month non-repayment period. This option is usually offered if you agree to settle the loan in one payment. The lender may also write off a certain amount so that it is easier for you to settle the loan.

The amount that is written off depends on the severity of your (borrower’s) situation and repayment capability. However, this agreement to settle the loan account for an amount lower than the actual outstanding amount comes at the cost of the loan status being marked as “settled” on your credit report.

Impact of Loan Settlement on your Credit Score

A one-time settlement of a loan between the lender and the borrower is called OTS in banking parlance. If you enter into an OTS, 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.

A closed account means that the loan has been paid in full and you have done well in repaying the loan whereas “settled” means that you were incapable of repaying the loan in time and thus, you can be a risky borrower in the future as well. Thus, it will lower your credit score.

Low credit score – Low creditworthiness – Fewer chances of getting a loan in the future

This settlement in your credit report along with your lowered credit score will pull the lenders away from you. They will be reluctant to give you a loan in the future. If you approach a bank for a loan, your loan application will likely get rejected, reducing your chances of securing credit at competitive interest rates or a credit card with a desired limit.

How can Borrowers Deal with The Problem

Sometimes a one-time settlement may seem like an opportunity to pay a lower amount, it should be considered as the last resort and borrowers should think of options that could help them pay off the loan in full.

Borrowers may withdraw funds from their savings and/or investments like a fixed deposit etc. to pay off the outstanding loan amount in full
Borrowers can also try to request the lender to extend the repayment tenure to get more time to make the loan repayment in full. Borrowers having a good existing relationship with the lender (bank) may try and request to waive off the interest component on the loan to repay at least the principal component on time, get their monthly installments restructured, or pay interest at reduced rates. Moreover, after you strike a deal with the lender, ensure that you verify the changes that happen on your credit report and credit score
Also, going forward try to maintain good credit behavior and credit score and try and make up for any dip in your credit score. Moreover, to avoid such situations in the future, you can try and opt for secured credit (loan) which will make it easier for the lender to trust your repayment ability.

Building Good Credit after Loan Settlement

Once you have opted for loan settlement, you should focus on improving your credit score which can take some time, usually between 12 to 24 months. Here are a few key ways that may help you build a good credit score after loan settlement:

Clear all your dues
Avoid making credit enquiries
Reduce overdependence on credit by maintaining a low credit utilization ratio

Important Aspects of Loan/Debt Settlement

Here are a few key aspects that you should consider at the time of loan settlement/debt settlement:

"Loan settlement" is not "loan closure" and must be avoided until necessary as it indicates an inability to pay your debts completely and on the stipulated time. Thus, it negatively affects your credit report and credit score, which in turn can make it difficult for you to secure credit in the future
Loan settlement/settlement on the loan can remain recorded on your credit report for seven years and affect your credit score
Any loan that is due by more than 90 days is classified as a non-performing asset by the lender (bank) and 180-270 days after the payment date, the bank writes off the loan. However, the settlement of the loan with the bank can happen before or after the write-off. If the settlement has happened before the write-off, the credit report will be updated as "settled". But if the settlement happens after the write-off, the credit report will be updated as "post-write-off settled". Both of these conditions have a negative impact on your credit score and will make it difficult for you to secure credit from most banks and other financial institutions in the future. If given, you may be charged a higher rate of interest.

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FAQs

Can I take a loan again after loan settlement?

Loan settlement signifies that you are unable to pay the loan on time and have requested the bank to settle it. This harms your creditworthiness and lowers your CIBIL score significantly. Now, it depends on your current CIBIL score and how low it has fallen for you to avail a fresh loan. You still might be able to fetch a loan under your name but for that, you need to settle all your existing debts and overdues.

Is it good to do a loan settlement?

Loan settlement should be done under circumstances of an emergency or cash crunch situation, as it may lower your CIBIL score. Further, it does not make a good impact on the new lender when you approach for fresh credit. Hence, it is not a good idea to settle your loan with the lender.

Will my CIBIL score improve after the loan settlement process?

CIBIL score does improve gradually, as it is not an overnight process. It may require from 4 to 12 months to show some positive changes, after your loan settlement, as well as diligent use of credit and good payment history.

How can I remove the settled status from my CIBIL report?

You can remove the ‘Settled’ status from your CIBIL report by clearing your outstanding dues with all the lenders. After clearing all your dues you need to obtain a ‘No-Objection Certificate’ from your lender and submit it to TransUnion CIBIL. Once the credit bureau receives the no objection certificate, it will remove the ‘Settled’ status to ‘Closed’ in your CIBIL report.

Does CIBIL’s credit score increase after closing a loan?

If you repay your loan in full and close the loan account on time, it has a positive impact on your CIBIL score as it shows a higher creditworthiness and good repayment behaviour.

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