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written by | March 21, 2022

Can Loan Settlement Affect Your CIBIL Score?

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What is loan settlement? 

A loan settlement is a common practice among borrowers who are in a bind. For example, if you settle your loan with a bank, it could cause your credit score to drop seven points, which will make it difficult for you to get a new loan for seven years. However, many borrowers are unaware that this can negatively affect their credit score, and a loan settlement can do more damage than one would think. Furthermore, if you're wondering how loan settlements can affect your CIBIL score, read on! 

Did you know? 

The factors considered for settling the loan amount with the lending bank include job loss, serious accident to the borrower, or if the borrower has a critical medical condition. Although this looks like a favour, your credit score takes a major hit after the settlement.

How Does Loan Settlement Impact Your CIBIL Score?

It is possible for many debtors that the impact of loan settlement on their CIBIL score would be detrimental. The majority of borrowers are entirely ignorant of the negative effect that a one-time payment might have on their credit rating. Choosing to settle your debt means you can expect your credit rating and score to be negatively affected in the future. If you have a ‘settled debt’, it is not unusual for your credit report to be adversely impacted.

Loans settlement may harm your credit score in a variety of ways.

One of the most typical methods is to declare bankruptcy and write off the outstanding debts, and this is accomplished by agreeing to a lower loan amount in return for a reduced amount of interest to be paid on that loan.

If you find yourself in a difficult financial position, paying off a loan is not a good option. When it comes to one-time offers, banks are quite thoughtful, yet most borrowers are unaware of the ramifications of such an agreement. Depending on the circumstances, it might cause your credit score to deteriorate and make loan applications more difficult for up to seven years after you file for bankruptcy. Consider the hazards connected with this form of loan settlement with the bank before proceeding.

A loan settlement is when you settle the loan in one go and take time off from making payments. It's a bad idea for several reasons, including that it can negatively affect your CIBIL score for up to seven years. However, if you can make repayments in a reasonable amount of time, you may want to consider a loan settlement.

 In the past, loan settlements lowered a borrower's CIBIL score, which can be detrimental to your financial future. CIBIL keeps your credit report record for seven years, so paying off any remaining balances is essential. Besides, your debt-to-income ratio has already dropped, which is a crucial indicator of your ability to repay debt.

The lender will agree to reduce the outstanding balance in exchange for the debtor's agreement to accept less than the total amount due. It may seem like a good idea at the time, but the impact on your credit score can be far more harmful in the long run. It is why borrowers should avoid Loan Negotiations to prevent a CIBIL Score-damaging event. Instead, it is a way to avoid paying off the balance in full.

Also Read: Loan Rejection and Credit Score

Loan Repayment Might Harm Your CIBIL Score

Your CIBIL score is calculated based on your repayment history, behaviour, and credit limit in India. If you've had trouble making payments, your credit score will probably be lower than the average.  

However, a single delay will not affect your CIBIL score if you make a timely and consistent payment history. Your CIBIL score is based on these factors, so make sure to keep your payment history up-to-date.

  • A good track record of repayment will boost your score. Defaulting on a loan is bad for your CIBIL. If your credit score goes down, lenders will be less willing to lend you money. Lenders use the CIBIL score as a guide to assess your creditworthiness. 
  • You should monitor your credit history regularly. 
  • Keep the number of loans low and the amount of debt low. 
  • If you share a joint account, make sure you monitor the performance monthly. If there's a missed payment, it could lower your CIBIL score. It may take a long time to repair your credit report if you make payments late or skip them altogether.
  • To avoid damaging your CIBIL score, you should avoid late payments. A single delay will not have a significant impact on your score, but a few missed payments can result in a considerable drop in your credit history. 

What Should Banks Do if a Borrower Fails to Repay a Loan?

Banks have several options when a borrower fails to repay the loan. They can recover the money through collateral in most cases, but if the borrower does not pay the loan for more than three months, the lender will declare him a non-performing asset (NPA). This means that the borrower will no longer be eligible for loans in the future. Lenders can also contact borrowers' guarantors.

The bank should contact the borrower to determine a repayment plan to help them repay the debt. They will also fall back on the collateral if the borrower does not repay the loan, and this collateral may not be enough to cover the debt. 

When a borrower fails to pay their loan, the bank will begin a follow-up concerning the settlement of the loan with the bank

  • The first step in the process of debt recovery is contacting the lender. If the borrower misses a single repayment, the bank may offer an EMI holiday. 
  • The bank will contact the borrower to explain the situation and arrange a repayment schedule that will work for both parties. If the borrower fails to respond to the reminders, the bank may send a legal notice. 
  • The borrower should remember that the repaid amount belongs and should not be kept as collateral. If the borrower does not respond to the reminders, the lender can initiate legal action against the borrower.
  • Lenders must follow up on a missed repayment, and they can negotiate with the borrower or seek restructured finance. If a borrower has failed to make settlement loans for more than three months, the lender will pursue legal action against them and charge default interest. 
  • Lenders can also impose penalties for defaults and late payments. However, they should only do this if the debtor has not been able to pay their debt for a specific time.
  • Furthermore, a lender will also try to recover the money through the collection agency. If this is not possible, a lender may pursue debt settlement.

Also Read: How do you repair your Credit Score?

The Aftermath of Debt Settlement

When a loan settlement is reached, both the lender and borrower agree to settle the debt. 

  • One of the biggest problems with loan settlement is a lack of knowledge. Many people in a sticky situation tend to opt for a Time Settlement without knowing the long-term impact of this choice on their credit score. Although the settlement does not negatively affect the CIBIL score, the damage it causes is more significant than one can imagine. In fact, after a Time Settlement, it is complicated to borrow for seven years.
  • Although loans settlement protects the borrower from recovery agents, the lender will report the payment to CIBIL. The bank will write off the waived amount and report the settlement to credit bureaus, lowering the borrower's credit score by 75-100 points. However, the borrower can still protect themselves by reaching out to family members and friends for financial help.

Conclusion

A loan settlement can hurt your credit score for a very long time. However, failing to do so might land you the status of ”written off”, which is arguably worse. If you have settled debts, be timely with your payments.Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

FAQs

Q: Do settlements have an impact on my CIBIL report?

Ans:

If you have had a loans settlement, your lender will mark your account as ‘settled’ in your report. It will hurt your credit score, but it is better than the alternative, which is a written-off status. If you have a settled debt, you should make sure to make all of your payments. If you can't, you should liquidate your assets to pay them off.

Q: What effect does the loan settlement process have on your CIBIL score?

Ans:

In reality, it doesn't affect them as long as they pay off the debt on time. The biggest problem with settlement is a lack of knowledge, and many borrowers make this mistake, only to regret it later. Your CIBIL report is valid for seven years, and lenders use this to determine your financial health.

Q: How long will the settlement be shown on the credit record and CIBIL score?

Ans:

If you have made a loans settlement with your bank, you will need to know how long it will stay on your credit report and CIBIL score. The CIBIL report tracks payments for seven years. In addition, your history of defaults will still be included in your CIBIL score, and this can negatively impact your CIBIL score.

Q: How long does it take to recover from a debt settlement?

Ans:

A loan settlement on a loan can harm your credit score for up to seven years. It is because the settled debt will show up on your credit report as ‘settled’, not paid in full. It will damage your credit score by 100 to 125 points. Lenders will view your credit history when deciding whether or not to lend you money. However, a loan settlement amount is a viable option if you are 90 days behind on your payments.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.