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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, how does settlement affect CIBIL score, and is housing loan settlement any different? We’ll break it all down in this guide. 

Loan Settlement: What It Means for CIBIL & Your Credit Report?

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.

It may seem like a good choice when funds are tight, but think about how settlement affect CIBIL score and your future borrowing.

Loan Settlement Effects on Credit Score: How Much Does Your Score Drop?

Here are the loan settlement effects on credit score:

  • 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.

Does Housing Loan Settlement Affect CIBIL Score Differently?

The effect of a housing loan settlement on your CIBIL score is almost similar to what it is on other types of loans. The major impacts like loans being marked as “settled” rather than “closed” and a drop in score by 75-100 points remain the same. But the practical consequences of housing loan settlement might differ. 

Since home loans involve larger amounts and longer tenures, housing loan settlement might raise more red flags when you apply for another home loan specifically.  Lenders in the housing finance sector scrutinise past home loan settlements more carefully. This ultimately makes your home loan application’s approval quite challenging. 

Better Options Than Loan Settlement in India

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 Loan Settlement Affect Your CIBIL Score?

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.

When Should You Settle a Loan & What to Avoid

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.

How to Repair Credit After Loan Settlement

While the loan settlement effects on credit score can be adverse, disciplined repayment behaviour can gradually help rebuild your creditworthiness. 

Here are some useful tips to repair your credit score after a loan settlement:

1. Ensure you pay all your current credit card bills, EMIs, and other obligations by their due dates.

2. If you have active credit cards, use only 20-30% of your available credit limit. High utilisation signals financial stress, while low utilization shows you’re managing credit responsibly. 

3. Avoid applying for multiple loans or credit cards. Each application triggers a hard inquiry on your report, which temporarily lowers your score.

4. Check your CIBIL report every few months for errors or discrepancies. 

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.

Does settlement affect CIBIL score for a home loan?

Yes, settlement does affect CIBIL score. It may drop by 75–100 points, with the account marked as “settled” for 7 years, significantly reducing the chances of future home loan approvals. 

How much does CIBIL drop after loan settlement?

After a loan settlement, your CIBIL score can drop by around 75-100 points. Though the exact reduction depends on your overall credit history.

Can my CIBIL score recover after a loan settlement?

Yes, your CIBIL score can recover after a loan settlement through consistent on-time payments, low credit utilisation, and responsible credit behaviour over 12-24 months, though complete recovery takes time and discipline.

What is the difference between a loan settlement and loan write-off?

A loan settlement is a negotiated agreement where you pay a reduced amount to close the debt. A loan write-off is an accounting procedure, where the lenders remove the loan from their books, though you still legally owe the money.

Can you remove the settled status from CIBIL by repaying?

Yes, you can remove the settled status from CIBIL report by repaying. Once the outstanding amount is cleared, you can request an NOC from your lender and submit it to the credit bureau to get the “settled” status changed to “closed.” 

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