If you have taken a loan most of us try to repay it on time as we all know that not doing that will impact the Credit Score. But you may face some unforeseen situations due to which you are unable to pay equated monthly installments (EMI) for few months. This will negatively impact your credit score and will hinder you from taking loans in future plus you will get calls from the bank or the lender from which you have taken the loan to repay it.
But if you approach to your lender, they might offer you to get into a settlement where your bank agrees to accept part payment of the loan. Although it may look a lucrative option to you but such settlement can unsettle your credit history.
How Debt Settlement Affect Credit Score?
The one-time settlement offer by the bank to a borrower is called as OTS in banking parlance. If you enter into such settlement it basically conveys that you accept that you are incapable of paying the loan amount in full. This information will be conveyed to your credit bureau by your bank. The credit bureau will mention the same as “settlement” in your CIBIL credit report against that particular loan in the account information section. In the account section there is a sub-section called Days Past Dues (DPD). This section has the repayment record of the borrower for the past 36 months on a month-by-month basis. In the DPD section an “o” means no dues; anything other than that is considered as a negative for the borrower. The loan account information in your credit report will not show any amount overdue but it will reflect account status as settled.
Any loan that is due by more than 90 days is classified as a non-performing asset by the bank and 180-270 days after the payment date, the bank writes-off the loan. However the settlement can happen before or after the write off. If the settlement had 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”. Under both the conditions it will impact your credit score and will be considered a negative by the banks and financial institutions. They will be reluctant to give you loan in future. If you approach a bank for a loan, it is highly likely that the loan will get rejected.
If you have settled a loan with your banker, you should take a no-dues certificate from your lender. This will ensure that interest doesn’t accrue on the outstanding amount that was not paid for settlement.
However, it is always advisable that you pay your equated monthly installments on time to avoid getting into such situations as your perspective lender will always see your repayment track record and what was the amount settled including your credit score before taking any decision on your loan application.