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Will a Loan Settlement Ruin My CIBIL Score?

Will a Loan Settlement Ruin My CIBIL Score?

Imagine you’re managing a number of financial obligations, when suddenly, an unexpected expense sends everything into chaos. You’re struggling with payments, and the lender proposes a settlement. It sounds like the light at the end of the tunnel , but somewhere inside, you wonder what this holds for your CIBIL score.

While settling a loan can reduce your immediate financial stress, it can also affect your credit score. What is loan settlement, and how may it affect your CIBIL score? We’ll break it all down in this guide. 

What is Loan Settlement in CIBIL?

For loan write-offs, a loan settlement in CIBIL takes place when a borrower cannot repay, and the lender agrees to accept an amount lower than the full amount owed to close the account. This differs from loan termination, where the borrower pays off the loan in full per the terms of the loan.

Settlement may seem like a good choice when funds are tight, but think about how it could affect your future borrowing.

Impact on Your CIBIL Score

Here’s how settlement affects your CIBIL:

  • Status Reported as “Settled” (not “Closed”): This status shows the lender was willing to settle for less than the full amount, suggesting a potentially bad sign to future lenders.
  • Immediate Score Drop (75-100 points): Most borrowers see a dip of 75–100 points, sometimes up to 150, depending on loan type and repayment history.
  • Stays on Report for 7 Years: “Settled” tag stays on your CIBIL report for up to seven years.
  • Difficulty in Future Approvals: If your credit score is low, you may have a more difficult time getting approved for credit cards or loans in the future because lenders may think you’re a risky customer.
  • Slows Rebuilding of Credit: Recovery takes 12–24 months of disciplined repayment before scores bounce back.

Loan Settlement vs Loan Closure

Many borrowers assume that settlement and closure are interchangeable when closing a loan account. In reality, they’re different, and one can affect your financial future far more than you think.

Here’s a breakdown to help you make the smarter choice:

AspectLoan SettlementLoan Closure
MeaningLoan settlement happens when a borrower works out a deal with the lender to repay a portion of the outstanding loan, typically due to financial difficulties. While it may ease the burden temporarily, it gets reported to credit bureaus as “Settled,” not “Closed.”Loan closure means fully repaying the borrowed amount along with the interest, in line with the terms agreed upon in your loan agreement. After the final payment, the lender provides a No Objection Certificate (NOC) or a closure letter, and your credit report reflects the status as “Closed.”
Impact on Credit ScoreMay cause a sharp drop in your credit score.Positively impacts your credit score.
CredibilityConsidered a red flag by banks and financial institutions.Enhances your financial credibility.
Future Borrowing It can reduce your chances of getting loans, credit cards, or housing approvals.Makes it easier to qualify for future loans.

Eligibility for Future Loans

Settling a loan might make it difficult for you to get credit in the future.

  • Creditors may see “settled” status as an indicator of financial irresponsibility.
  • Reduced possibility of getting approvals on new credit applications.
  • Even if you get a loan after settling one, you may face higher interest rates or stricter terms.

Loan Payoff Alternatives

Don’t rush to settle, consider this instead:

  • Restructure Your Loan: Approach your lender and attempt to adjust the terms of your loan, such as extending the loan pay-off time or lowering the interest rate that you’re paying.
  • Debt Consolidation: Combine multiple debts into one loan with a lower interest rate, streamlining payments.
  • Credit Counselling: Meet with financial counsellors to discuss options to manage your debts properly.

These alternatives may allow you to deal with your debts without staining your credit with a debt settlement.

How Long Does “Settled” Stay on Your Credit Report?

A “settled” stay on your credit report for seven years from its date of settlement. Throughout that time, it may impact your credit score and your access to new credit.

Lenders might still ask after seven years, but it shouldn’t negatively affect your credit chances anymore.

Should You Settle Your Loan?

The resolution should only be used as a last resort when all other options have failed. Although it can offer some immediate financial relief, it may also have long-term repercussions for your creditworthiness.

Before accepting a settlement, have your finances and/or credit report evaluated by financial advisors or credit counsellors to learn about all your possible options and the potential impact.

Conclusion

A loan settlement may provide temporary relief from financial distress, but you should understand how it will affect your credit in the long run. CIBIL scores play a major role in determining your future financial prospects, and actions like loan settlement also have long-term impacts.In case you are suffering from a low financial ebb or simply a tight financial situation, feel free to contact Tata Capital and get a loan that perfectly fits into your pocket and keeps your reputation and credit score intact.

FAQs

What is the distinction between loan settlement and loan closure?

Loan settlement is when the lender agrees to accept less than the amount owed because the borrower can’t afford to pay. Loan closure signifies successful repayment of the loan in full as per the terms of the contract, with a “closed” status in your credit report.

If I pay off a loan, will I be able to get another one in the future?

Paying off a loan can make it difficult to get credit later on. "Settled" could look to a lender like you have more of a poor financial history, which may mean tougher borrowing terms or may even mean rejection for credit. 

Can I bargain for better terms instead of settling for a loan?

Yes, you’ll be able to negotiate better terms with regard to your settlement, such as lower interest rates, longer repayment terms or taking a break from repayments for a while, before you settle on a settlement.

Can we eliminate the adverse effect of loan settlement?

To minimise the adverse effect of loan settlement, you can avail services like loan restructuring, consolidated loan or approach institutions offering credit counselling. These alternatives can help you better manage debt and maintain your credit score.

How many years does a settled loan stay on my credit file?

A settled loan can stay on your credit report for seven years from the date it was paid off. It could influence your credit score and limit your availability to new credit during that time. Settled status will generally be dropped from your credit report after seven years.

How to settle my debt if I cannot pay my loan? What is the best option?

Wherever possible, the settlement should be seen as the measure of last resort. Before you make the decision to settle, it’s a good idea to look into alternatives, including loan restructuring or credit counselling.
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