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Life is unpredictable and there are many things that you can’t control. For instance, despite your best efforts, you may go out of business one day. Similarly, if someone in your family falls seriously ill, then your entire savings can get depleted in just a few weeks.

In situations like these, if you have already borrowed a loan, then it can become challenging to pay the EMIs. If you miss more than a few of them, then the bank may consider you a “defaulter”, something which can lead to serious repercussions. This brings us to the concept of “settlement” and whether it can affect your credit score or CIBIL score.

What is “settlement” in loans?

When a borrower stops paying EMIs, then the bank waits for 90 days. Once this period is over, they usually send a notice of 60 days. If the borrower doesn’t respond even during this period, then the bank regard them as a “loan defaulter” and can take legal action. For instance, if the individual has taken a home loan, then the lender may proceed to seize the property. However, when the loans are unsecured loans such as personal loans, car loans, etc. then it’s difficult for the bank to recover the loan amount. Thus, if they aren’t able to reach an agreement with the borrower, then they may offer to settle the loan.

In loan settlement, a portion of the total debt is waived and your actual financial burden is lowered. So, you can pay only a portion of the loan and be done with it. Your loan account is closed and no legal action or otherwise is taken against you. However, is there a catch? The answer, unfortunately is “yes”.

Impact of loan settlement on CIBIL score

When you settle your loan, then you can pay the amount that’s agreed upon and close the account. However, the bank writes off the difference between the actual amount that you were supposed to be pay and one that you actually paid in your CIBIL report. They may also mark it as a “loss” or a non-performing asset and put your name on their loan defaulter list.

Since the instance of loan settlement is mentioned in your report, when you try to get new car loans, home loans, etc. in the future, you can expect to face a lot of difficulty. This is because no bank wants to loan money to individuals who have defaulted in the past. Moreover, it’s not easy to remove the loan settlement remark from your credit report. Your efforts towards credit score improvement may also fail to get the desired results.     

The solution

If you have settled a loan and it’s affected your credit score negatively, then you needn’t lose hope. You can still reverse the damage by taking the first steps:

  • Contact your bank and let them know that you are willing to pay the remaining amount of the loan. In most cases, they will happily agree and give the details of the procedure.
  • Once you have deposited the amount, you can request the bank to update the CIBIL authority about the same. After they have notified CIBIL, you have to wait for a few weeks before the change is reflected in your credit report.
  • If you see that the “settled” status of the disputed loan account has been changed to “closed” and any other negative remarks are removed, you can rest assured that your CIBIL score will improve quickly. You can check your report once again in another 30 days or so to confirm the same.

Conclusion

Defaulting on a loan is one of the worst things that you can do for your credit rating and report. The damage it causes is often irreversible. Thus, it’s advised that you create a budget and stick with it. Even if you have indeed defaulted, you must avoid settling the loan at all costs. Instead, you should ask your bank for additional time for repayment. If your problems are genuine, then it’s possible that they will grant you extra time so that you get your finances under control and resume the payments of the EMIs.

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