In India, many people turn to personal loans to manage unexpected expenses like hospital bills, home repairs, or even wedding costs. But when repayment becomes difficult, some borrowers consider a personal loan settlement as a last resort. While this might feel like a relief in the short term, it can have long-term consequences, especially on your credit report and CIBIL score.
What Does Personal Loan Settlement Mean?
When a borrower is genuinely unable to repay a loan due to issues like job loss, medical emergencies, or business failure, the lender may agree to accept a lump sum amount that is less than the total outstanding balance. This is known as a personal loan settlement. It allows the borrower to close the loan, but it’s important to understand that the loan will be reported as “settled” instead of “closed” in the credit report.
This “settled” status stays on your report for up to seven years and signals to other lenders that the borrower did not meet the full repayment obligations. This can significantly reduce your CIBIL score.
Impact on Credit Score
Your CIBIL score plays a crucial role in whether your future loan applications get approved. A score above 750 is generally seen as healthy. But when a loan is reported as settled, your score can drop by 75–100 points or more, depending on your credit history.
Here’s how it affects you:
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Loan rejections from banks or NBFCs
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Higher interest rates if you do get approved
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Fewer pre-approved loan or credit card offers
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Limited financial flexibility for several years
In a country like India, where credit scores are becoming more influential in every major financial decision, this can lead to serious setbacks.
Should You Go for a Settlement?
Settling your loan might seem tempting when you’re under pressure, but it should only be considered when all other options are exhausted. While it offers immediate relief, the long-term consequences can affect your ability to borrow again, lease a home, or even secure employment in sectors that check credit history.
Alternatives to Consider
Before opting for a loan settlement, try these options:
Loan Restructuring: You can request your lender to extend the loan tenure or reduce the EMI temporarily. This lowers your monthly burden without affecting your credit score.
EMI Relief: Some lenders offer EMI moratoriums or flexible repayment schedules during tough times. Look into these schemes for temporary relief without damaging your credit standing.
Balance Transfer: Shift your outstanding loan to another lender offering a lower interest rate or better repayment terms.
Borrowing from Family/Friends: A short-term loan from someone close to you can help avoid default and preserve your credit profile.
Steps to Rebuild After Settlement
If you’ve already gone through with a personal loan settlement and are seeing its effects on your credit report, here are a few steps to help you recover:
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Start repaying any current loans or credit card dues on time.
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Maintain a low credit utilization ratio—try not to use more than 30% of your available credit limit.
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Avoid applying for multiple new loans at once. Every inquiry reduces your credit score slightly.
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Consider taking a secured credit card or small personal loan and repaying it properly to slowly rebuild your credit profile.
Know Your Legal Rights
Always remember that financial difficulty does not mean you should tolerate harassment. As a borrower, you are protected under Indian law from aggressive recovery tactics. If you face bank harassment or threats from recovery agents, you have the right to file a complaint and seek legal help.
Understanding your rights and the RBI’s policies is important before entering any settlement conversation with the lender.
Final Thoughts
Choosing to settle a loan should never be your first option. It might ease your immediate stress, but the impact on your financial health is long-lasting. Be sure to explore restructuring, EMI relief, or temporary support from friends and family. If you do go ahead with settlement, make it a one-time decision and take active steps to rebuild your credit history.
For expert help on how to deal with bank harassment, manage loan settlement smartly, and stay legally protected, don’t hesitate to Contact Us today.
