Whether for unforeseen bills, a wedding, or a medical emergency, many Indians resort to personal loans when they are in financial need. Despite having high interest rates, these loans are unsecured, meaning you are not required to commit security. However, what would happen if you couldn’t pay back your debt in full? A Loan Settlement is one choice that lenders might make. However, it’s crucial to comprehend how a personal loan settlement may impact your credit report and CIBIL score before choosing to do this.
Personal Loan Settlement: What is it?
When a borrower experiences financial difficulties and is unable to repay the loan in full, a personal loan settlement takes place. In some situations, a one-time lump sum payment that is less than the entire amount owed may be accepted by the lender. This is seen as a partial payment rather than full payback, and it is usually only made available when the borrower can demonstrate that they are experiencing actual financial difficulties, such as losing their job, experiencing an emergency, or failing their business.
The lender closes the debt after the settlement amount is paid, but the story doesn’t stop there.
What Effect Does a Settlement Have on Your Credit Score?
Upon settlement, your lender will notify credit bureaus like CIBIL (Credit Information Bureau India Limited) of the loan’s status. Nevertheless, the debt will be noted as “settled” rather than “closed” or “paid in full”.
This status can have a detrimental impact on how prospective lenders determine your creditworthiness and remains on your credit record for up to seven years.
Impact on Your CIBIL Score
Your credit health is shown by your CIBIL score, which is a three-digit figure that ranges from 300 to 900. Better creditworthiness is indicated by a higher score. When determining whether to approve your loan applications and under what conditions, lenders frequently base their decisions largely on your score.
When a loan is categorized as “settled”, it means that you didn’t pay it back according to the terms that were agreed upon. Depending on your prior credit history, this can result in a large decline in your CIBIL score, perhaps by 75 to 100 points or more.
A lower rating may result in:
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Bank and NBFC loan denials
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Higher interest rates on future loans
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Rejection of credit card applications
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Fewer opportunities to receive pre-approved loan offers
Is Settlement Always a Good Choice?
Even while settling lowers your credit score, there are several circumstances in which it could still be the best option. A Loan Settlement could provide a way out and stop legal action if you’re in debt and unable to make your regular payments. It should only be used as a last resort, though, after exploring all other possibilities, such as loan restructuring or temporary relief.
Are There Any Other Options?
Think over these alternatives before deciding to settle your personal loan:
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Restructuring the loan: Ask the lender to lower the EMI or extend the term.
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Balance transfer: Shift your loan to another lender offering lower interest.
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Top-up loans: If you have an existing loan with a lender, they might offer an additional loan to consolidate your dues.
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Borrow from family or friends: This can be an interest-free or low-interest way to repay your debt without settling.
Concluding Remarks
It is true that settling a personal loan can lower your credit score and damage your credit history for years to come. This can have a significant effect on your future loan availability in India, where credit scores are a major factor for lenders. Before choosing to settle, always look into other options for repayment. If you do proceed with settlement, be sure to rebuild your credit by managing future credit responsibly.
Keep in mind that your credit score is a representation of your financial reliability and not just a number.
If you’re dealing with Bank harassment or need professional help managing aggressive recovery tactics, a Loan Settlement might be your solution. Contact Us today for a confidential consultation and get expert guidance on your options.
