Can a Loan Settlement Affect Your CIBIL Score?
Various factors negatively impact your CIBIL score, which brings down your creditworthiness in the view of lenders. Opting for a loan settlement is one such factor that can drastically bring down your credit score. But what is a loan settlement?
Loan settlements are often confused with loan closure. However, they are entirely different. Therefore, before we start with how loan settlements affect your CIBIL score, you must clearly understand how a loan settlement differs from a loan closure.
What Is a Loan Settlement and How Is It Different from Loan Closure?
In the event of unforeseen circumstances, a borrower may be unable to repay the loan on time. Subsequently, the lender may decide to either extend the repayment tenure, set up a one-time repayment option, or waive off a part of the fee.
The borrower may contact and opt for a loan settlement in such a situation. It is a one-time settlement process where a lender agrees to accept a lesser amount than the dues. Lenders can agree to a settlement to avoid litigation and the time-consuming hassles of recovery.
On the other hand, a loan closure is when your lender closes the loan account after you have successfully repaid all your debt within the due deadline. Subsequently, the lender sends a report to the credit information bureau to update the loan status. Submitted reports stating consistent and timely repayments contribute positively to CIBIL scores and add to the borrower’s creditworthiness.
However, failure to meet the assigned deadline or any tweak in the loan repayment process may put a red mark on your CIBIL score. Therefore, loan settlement should always be the last resort for borrowers.
How Can Loan Settlement Affect Your CIBIL Score?
When a borrower approaches a lender for loan settlement, the lender will verify the scenario and decide whether or not to write off the debt or take necessary actions. If the lender agrees to a settlement, they will submit the report to the credit bureau and update the loan status to “settled” rather than paid.
The application for loan settlement affects the credibility of borrowers as it marks them as high-risk borrowers with poor financial management and credit behaviour. The lenders will send the loan settlement report to credit bureaus, reflecting the borrower’s CIBIL score. It can drop your CIBIL score by 75-100 points.
The loan settlement status submitted by the lender to the credit bureau may even last for 7 years, impacting your future borrowings for higher loan amounts at lower interest rates. Furthermore, depending on the severity, lenders or banks may bar you from applying for loans. In short, by availing loan settlement, you will face issues when applying for new loans until the status changes.
Under Which Circumstances Will a Lender Allow Loan Settlement?
Due to unforeseen situations, one may need more time to repay their debt. Therefore, lenders approve a loan settlement only when borrowers are going through considerable financial distress.
Loss of a job, emergencies such as medical expenses and loss of savings are some genuine reasons for applying for loan settlement. However, banks and other financial institutions will allow loan settlement after thoroughly verifying the borrower’s financial situation.
How to Deal With Loan Settlement?
Remember that loan settlement is not a good solution as it will considerably lower your credit score. Therefore, you must carefully analyse your account and apply for loans within your capability as it would eliminate the chances of repayment failure.
If you ever find yourself in a situation where you won’t be able to pay off the debt, you may liquidate your assets or fixed deposits to pay off the debt. If you don’t want to liquidate your assets, you can apply for debt consolidation or transfer your loan to a new lender at lower interest rates.
Another alternative is to pledge gold, real estate or stocks as collateral to get a secured loan to cover your existing debt. You can also request an extended loan repayment tenure, if these alternatives fail. The lender may waive off the interest, so you can repay the loan with minimal effects on your CIBIL score.
Suppose you have already applied for a loan settlement. In that case, you should immediately re-evaluate your financial strategy, figure out your shortfalls and pay off the remaining debt as soon as possible. Once you have fully repaid your debt, you can request a No Objection Certificate from the lender and submit the same to the credit bureau to remove the “settled” tag.
Once the “settled” tag is removed from your credit report and you improve your credit score, you can start applying for loans again.
To avoid such circumstances, carefully managing your debt from the beginning is advisable. You should also note that a poor CIBIL score can hinder your employment opportunities. It takes a lot of time and financial discipline to improve credit scores. Therefore, manage your finances effectively by availing credit only for necessities,creating longer credit history, regularly checking Credit Information Report, etc
Frequently Asked Questions (FAQs)
How can I improve my CIBIL score?
You can improve your CIBIL score by paying off your credit card bills and loans on time. You should also diversify your credit portfolio, avoid making multiple loan applications and closely monitor your CIR (Credit Information Report).
How can I check my CIBIL score online?
You can check your CIBIL score online by downloading your CIR from the website of TransUnion CIBIL by entering your required details.
Are CIBIL score and credit score the same?
TransUnion CIBIL (Credit Information Bureau India Limited) is India’s prominent credit bureau. The credit score issued by this institution is called the CIBIL score. However, the term credit score is used in a general sense. In short, the credit score provided by TransUnion CIBIL is known as CIBIL score.
What information is mentioned in a CIR?
Apart from personal and bank details, a CIR contains the credit history, past repayments, name of the lender, type of loan, recorded defaults and current balance.