Top Mistakes to Avoid When Settling Your Loan
Understanding Loan Settlement
Loan settlement allows borrowers to negotiate with the bank to pay a reduced amount instead of the full loan. While this can provide relief in financial distress, mistakes during the process can lead to legal or financial issues. Avoiding common errors ensures a smoother settlement and minimizes negative consequences.
Mistakes to Avoid in Loan Settlement
1. Not Understanding the Impact on Your CIBIL Score
- Settling a loan reduces the outstanding amount but marks the loan as “settled” instead of “closed” in your credit report.
- This lowers your CIBIL score, making it harder to get future loans or credit cards.
- Instead of settlement, check if loan restructuring or refinancing is a better option.
2. Not Negotiating the Best Terms
- Many borrowers accept the first offer made by the bank without negotiating.
- You may be able to reduce the settlement amount or negotiate a longer repayment period.
- Ensure you get a written agreement confirming the final terms.
3. Ignoring the Written Settlement Agreement
- Always request a written confirmation from the bank stating that the loan is settled in full.
- If not documented, banks may continue to demand payments or list the loan as unpaid in credit reports.
4. Paying the Settlement Amount in Cash
- Never pay the settlement amount in cash as it is difficult to track.
- Always make payments through bank transactions and keep receipts as proof.
5. Not Checking Your Credit Report After Settlement
- After settling the loan, check your CIBIL report to ensure the status is updated correctly.
- If the bank fails to update the records, raise a dispute with CIBIL or the concerned credit bureau.
6. Not Exploring Alternatives to Settlement
- Loan settlement should be the last option as it impacts future borrowing.
- Consider alternatives like EMI restructuring, loan extension, or a top-up loan before opting for settlement.
Final Thoughts
Loan settlement can help borrowers facing financial hardship, but mistakes can cause long-term damage. Before proceeding, understand the consequences, negotiate carefully, and document everything. If needed, seek expert advice to protect your financial future.
