The Impact of Loan Settlement on Your Credit Score

The Impact of Loan Settlement on Your Credit Score

What is Loan Settlement?

Loan settlement is a process where the borrower negotiates with the bank to pay a reduced amount instead of the full outstanding loan. This usually happens when the borrower is unable to repay due to financial difficulties. While it provides relief in the short term, it affects the borrower’s credit score in the long run.

How Loan Settlement Affects Your Credit Score

1. Settlement Status on CIBIL Report

   • When a loan is settled, banks report it as “settled” instead of “closed.”
   • This indicates that the loan was not fully repaid, negatively impacting the credit score.

2. Drop in CIBIL Score

   • A loan settlement can reduce the credit score by 50-100 points.
   • This can make it difficult to get future loans or credit cards.

3. Difficulty in Getting Future Loans

   • Lenders check credit reports before approving loans.
   • A settlement record makes borrowers appear risky, leading to loan rejections or higher interest rates.

4. Impact on Creditworthiness

   • A “settled” loan remains in the CIBIL report for at least seven years.
   • This lowers trust in the borrower’s financial responsibility.

Can a Settled Loan Be Removed from the CIBIL Report?

• Borrowers can negotiate with the bank to update the status to “closed” by paying the remaining amount.
• Requesting a goodwill adjustment from the bank may help, but approval is not guaranteed.

How to Avoid Loan Settlement

• Choose loan restructuring if unable to repay.
• Request an extension or reduced EMI instead of settling.
• Seek financial advice to manage repayments effectively.

Final Thoughts

Loan settlement may provide temporary relief, but it impacts the credit score for years. Before opting for settlement, borrowers should consider alternatives and understand the consequences. If facing financial difficulties, seeking expert advice can help in making the right decision.