How much impact does a loan settlement have on your CIBIL score?

Summary

Loan settlement has a direct impact on your CIBIL score, and it can harm your financial credibility. Whenever a person is unable to repay the full amount of the loan due to any reason, the bank gives him the option of settlement, in which some amount is waived, and on repaying the remaining amount, the loan is recorded as “Settled”.

Once settled, the CIBIL score is reduced by 50-100 points, and the record stays in the credit report for 7 years. It becomes hard to avail a new loan in the future as the bank might deny providing a loan considering it as default or provide a loan at an increased rate of interest. Further, there could be trouble in approving a credit card.

To avoid a loan settlement, it would be better if you consider options like reducing EMI from the bank, loan restructuring, or balance transfer. If a settlement is already done, make timely payments, take small loans, and check your credit report regularly to improve your CIBIL score.

Introduction

In today’s time, whenever we go to take a loan from a bank or financial institution, our CIBIL score is checked first there. This score helps in deciding how eligible a person is to repay the loan. But what if, for some reason, you are unable to repay your loan completely and choose the option of loan settlement?

First of all, it is important to understand that loan settlement does not mean repaying the loan completely. When a person has taken a loan from a bank or NBFC, but due to some financial problem, he is unable to repay the entire loan, then the bank or financial institution can provide him an offer of settlement. This means that the bank waives some amount of the loan and is ready to take the remaining amount from the customer in a lump sum.

Whenever a loan is settled, the bank records it in the CIBIL report as a “Settled” status. This status indicates that the customer did not repay the entire loan but settled with the bank. This hurts the CIBIL score, and your score can drop by 50-100 points. Also, in the future, if you apply for a new loan or credit card, the bank may refuse to give you a loan or offer a loan at a very high interest rate.

Overall, a loan settlement can prove to be detrimental to the CIBIL score, but this impact can be minimized if financial planning is done properly. Further in this article, we will know in detail how to improve your CIBIL score after loan settlement and what options should be considered.

What is Loan Settlement?

It is a financial process in which the bank or financial institution allows the loan taker to settle the loan by paying a lesser amount instead of the entire outstanding loan amount. This facility is for those who are unable to repay their loans on time and are continuously defaulting.

Under a settlement, the bank can agree on a lump sum amount, which closes the loan. However, it is important to note that settling the loan can affect your CIBIL score, making it difficult for you to get a loan in the future. Therefore, it should be adopted only as a last option.

How does a Loan Settlement work?

When a person is unable to pay the EMI of his loan on time and the outstanding amount accumulates over a long period, the bank or financial institution offers the option of loan settlement. In this, the bank allows the customer to pay a discounted amount instead of the entire outstanding amount, thereby settling the loan matter.

The process of settlement comprises discussions between the bank and the customer, wherein the bank assures that the customer can’t pay the entire loan amount. Thereafter, the bank issues a single-payment offer, which is typically lower than the outstanding loan balance. On the payment of this settled amount by the customer, the bank marks the loan as “Settled”. Yet, this is not good for the CIBIL score since it is not treated as a “Complete Payment”.

Hence, loan settlement should be opted for as a matter of last resort, and if at all possible, loan repayment schemes, loan restructuring, or alternative financial solutions must be opted for so that the credit rating is not impacted.

What documents are required for a Loan Settlement?

The following documents are required:

• Aadhar Card, PAN Card, Passport, or Driving License, etc.

• Salary slips, income tax returns, bank statements, etc.

• Loan Settlement letter, loan details, payment receipts, etc.

• Investment documents, property documents, insurance policies, etc.

How do I apply for a Loan Settlement online?

If you want to apply it online, then follow the easy steps given below:

Visit the bank’s website or app.

• Open the official website or mobile app of your loan provider or bank.

• Sign up if you already have an account, then log in. Otherwise, create a new account.

Check the customer support section.

• Go to the ‘Customer Support’ or ‘Contact Us’ section on the website or app.
• Here, you can find the option related to “Loan Settlement”, such as:
• Filing a loan-related complaint.
• Request form for loan settlement.

Fill out the request form for the settlement.

• Select the “Loan Settlement Request” option.
• Fill in the required details, such as:
• Your name
• Loan account number
• Email ID and mobile number
• Reason (why you want to settle, such as financial problems or reduction in income).

Upload the required documents.

• Upload documents that show your current financial situation, such as:
• Income certificate or salary slip
• Bank statement
• Any other proof that explains your problem.
• Upload all the documents by scanning them in the correct format (PDF or JPEG).

Submit and wait for the bank’s response.

• Once you have submitted the form, the bank will verify your request.

• The bank will most likely contact you within 7-10 working days. They will notify you of the settlement through email, call, or message.

Read the bank’s offer.

• The bank will make an offer to waive some portion of your pending amount. Carefully read it.

• If you accept the offer, go ahead. Otherwise, bargain further.

Make payment

• Pay the decided settlement amount from the bank in online payment mode.

• The bank will provide a payment confirmation and close your loan account.

What is the difference between a Loan Settlement and a Credit Card Loan Settlement?

Although both Loan Settlement and Credit Card Loan Settlement aim to provide relief to the borrower, there are some important differences between them.

Points of Difference	Loan Settlement	Credit Card Loan Settlement
Type	Settlement of any type of loan (personal, home, car, education, etc.)	Settlement of Credit Card dues only
Settlement Process	The bank fixes a lump sum amount, on payment of which the loan gets settled.	The credit card company settles the amount at a fixed amount.
Impact on CIBIL score	CIBIL score may drop by 50-100 points, and it may become difficult to get a loan in the future	There is a huge impact on the CIBIL score, and it may be difficult to get a new credit card.
Possibility of getting a loan in the future	You may face problems in getting a home loan, car loan, or any other loan	Credit card companies may refuse to issue the card.
Possibility of being blacklisted	Less	especially from credit card companies

How much impact does a Loan Settlement have on your CIBIL score?

Loan Settlement has a direct and negative impact on your CIBIL score. When a person takes a loan from a bank or NBFC and is unable to repay the entire amount due to some reason, the bank gives him a chance to make a settlement, which is called a Loan Settlement.

However, there is a huge difference between a Loan Settlement and a Loan Closure. If you close your loan by repaying its full amount, it is recorded as “Closed” in your credit report, which improves your CIBIL score. But if you have got some amount of the loan waived off under an agreement with the bank, it is reported as “Settled”, which can harm your credit score.

What are the effects of a Loan Settlement on your CIBIL score?

• When a bank or NBFC reports to CIBIL that your loan is “settled”, your score drops immediately. The amount of drop depends on how good your score was earlier.

• Banks and financial institutions put customers who have settled their loans in the “high-risk” category. This means that in the future, if you try to take any type of loan (personal, home, car, education), your application may be rejected.

• If you have settled a loan, it may be difficult to get a credit card from any bank in the future. Banks look at your credit history, and if they see a “settled” status, they may refuse to give you a credit card.

• Even if a bank decides to give you a loan, you may get the loan at a very high interest rate. This is because banks consider you a risky customer and charge a higher interest rate to protect their money.

• Loan settlement information remains in your CIBIL report for at least 7 years. This means that even if you improve your financial behavior later, your settlement record will continue to be visible to banks and may affect your creditworthiness.

What are the ways to improve your CIBIL score after a loan settlement?

If you have settled the loan and now want to improve your CIBIL score, then you can take the steps given below:

• Pay all loan and credit card bills in full on time.

• If possible, try to change the “Settled” status to “Closed” by contacting the bank.

• Use credit cards limitedly and make full payments on time.

• Take a small loan and repay it regularly to build a new good credit history.

• Check the CIBIL report regularly and request that CIBIL rectify any mistakes.

How do you choose the loan settlement service?

Here are some important points to consider that will help you choose the right Loan Settlement service:

Check the service provider’s credentials.

Before hiring a settlement service, make sure that the service provider you are hiring is registered and certified with financial institutions and banks. Only a reliable service provider can provide you with the right guidance and support. Checking online reviews and customer feedback is a good way to do so.

Check the service charges and other expenses.

Many service providers also charge a service fee, but make sure that the charges are not high and there are no hidden costs. Negotiate with the service provider beforehand about which services are free and for which you will have to pay extra.

Understand the settlement process.

Carefully understand the settlement process offered by the service provider. Do they understand your entire situation and provide you with a better solution to negotiate with the bank? A good provider will give you complete information about the paperwork and the process so that you understand the entire process properly.

Make sure they are legally compete.

You should also ensure that the service provider is legally recognized and aware of all the rights that are associated with the settlement of your loan. This will prevent you from facing any legal hassles in the future.

Consider other solutions as well.

Before choosing the settlement process, make sure that the service provider also gives you information about alternative solutions like loan restructuring or new payment plans. These options can sometimes be better than a settlement and do not hurt your CIBIL score.

Customer support and communication

A good service provider will always stay in touch with the customer and resolve your problems properly. Make sure they answer your questions quickly and are ready to work with you in any difficult situation.

Join our service

If you are also trapped in the debt trap and are facing a financial crisis and want to adopt the path of Loan Settlement, then you can apply for our Loan Settlement service. We will help you in settling your loan. Along with this, we provide you relief from the burden of the loan within 6 – 8 months. If you want to get more information about our service, then you can contact us.

How long does it take for a Loan Settlement to be processed?

The time taken for the settlement process also depends on various factors, such as the policies of your bank or lender, the outstanding amount, and the communication between the two of you. Usually, this process can take from 1 to 3 months.

The first action in the process of settlement is to approach the bank, where you tell your problem and payment status to the bank. Then, the bank proposes a settlement offer according to your situation. In case you agree with that proposal, you need to pay the amount to the bank within the agreed time. The bank indicates the loan as settled, and this would take some time.

The longer this entire process continues, the more it can impact your CIBIL score, so it is preferable to resolve the issue sooner.

What are the advantages and disadvantages of Loan Settlements?

It has the following advantages and disadvantages:

Advantages

• Loan Settlement improves the financial condition of the borrower.

• By doing a Loan Settlement, you can manage your income and costs better and avoid a financial crisis in the future.

• The heavy burden of debt often causes mental stress. With Loan Settlement, the borrower gets relief from this stress, and he can find mental peace in his life.

• Through Loan Settlement, the borrower gets a chance to get part of his debt waived off.

• This helps to improve his financial condition and gives him relief from a heavy financial burden.

• Although a Loan Settlement can affect the borrower’s credit score, by following the agreement on time and properly, he can gradually improve his credit score.

Disadvantages

• In the future, the borrower may have difficulty in getting loans from these institutions.

• Through Loan Settlement, the entire loan of the borrower is not waived off. He still has to pay some amount, which can affect his financial condition.

• During a Settlement, the agreement between the bank and the borrower has many conditions. The borrower is required to follow these conditions, which can limit his freedom.

• After a Loan Settlement, the borrower’s credit score may be affected.

• Loan Settlements may create difficulties in taking new loans or obtaining credit cards in the future.

• Due to a Loan Settlement, the borrower’s relationship with the bank and other financial institutions may deteriorate.

Conclusion

Loan settlement has a deep and negative impact on the CIBIL score. This process is adopted when a person is unable to repay the loan taken from the bank in full due to his financial condition. In such a situation, the bank gives the loan holder the option of settlement, in which some amount of the loan is waived, and the loan is recorded as “Settled” after paying the remaining amount in a lump sum.

Whenever a person settles his loan, it gets recorded in his credit report, and the CIBIL score can fall by 50-100 points or more. Apart from this, this information remains in your credit report for at least 7 years, which may cause problems in getting any new loan or credit card in the future.

If you have settled the loan, then in the future, whenever you take a new loan from a bank or NBFC, they will check your CIBIL report. If your report shows a “Settled” status, the bank may consider you a high-risk customer and refuse to grant you a loan.

Frequently Asked Questions (FAQ’s)