While taking a loan you may have planned out your repayment for a certain period. But it so happens that you find yourself in a situation that you are unable to meet the repayment commitment. You approach your bank or lender with your problem and they might offer you a choice of One Time Settlement. It would seem like a favour to you and you will jump at it and take it up. But, are you aware that it takes a toll on your CIBIL score? Let’s see how:
What the bank or the lender does?
If the borrower has genuine issues and is finding it hard to meet the repayment, the lender or the bank offers the borrower an One Time Settlement of the loan. The lender or the bank offers you the choice on completion of 6 months of non-payment of dues. They will take into consideration things such as job loss, if the borrower has met with an accident or has a serious medical condition. The lender or the bank authorities sit down with the borrower and takes stock of his situation and the genuineness of his problem and they decide to write off the difference between the amount that has been paid and the amount that is due.
The lender or the bank then reports a loss and the borrower is let off the hook. While it may seem a sign of relief to the borrower, as then he won’t be in the list of the recovery agents, but he is not aware of the fact that he pays a heavy price for the same.
Loan settlements impact on the CIBIL score
When a bank or the lender is writing off a loan, they will report it to CIBIL. Though the relationship between the bank or the lender and the borrower has terminated, CIBIL doesn’t take that into consideration. Instead of closing the transaction, they term it as settled. When a loan is termed settled, it is viewed as a negative credit behaviour and the borrower’s credit score drops by 75-100 points.
The CIBIL holds this record for over 7 years. So, if the borrower has to take a loan during that period, it is likely that the lenders will be vary of the borrower and try and stay away from giving the borrower any loan. The banks and lenders mainly look for the borrower’s past repayments before considering offering him a loan. And if the borrower has the settlement in his credit report, the banks and lenders will reject the loan.
Borrower’s lack of awareness
Borrowers who are in a sticky situation take up on the One Time Settlement offer, but they are unaware of the affect it has on their credit score. They do not realise that it does more damage to your credit score than one can imagine. It could result in the borrower finding it hard to get a loan for the next 7 years as CIBIL will hold the record for that period.
Borrower’s way out
If you as a borrower are facing difficulty repaying your loan due to reasons like unemployment, or if you have met with an accident or suffering from severe medical condition, do not jump at the first chance of the One Time Settlement option that your lender or the bank may offer you. Keep in mind that the settlement will harm your credit score. What you can instead do is, see if you can liquidate a part of your portfolio or some asset to pay off your loan. If you are not able to do that, reach out to your family and friends. Avoid settlement by all means.
If you have no option then keep the settlement as your last option. But, you could talk to your lender or bank to extend your repayment period or to give you easier repayment term, waive the interest for a certain period.
After a decision has been made with your lender or the bank, make sure you check your credit score and report to see where you stand. Once you know what your score is, make an effort to repay all your loans and maintain a good credit behaviour. This will bring up your credit score in the next 12-24 months.
The next best thing to do while taking a loan is have a contingency plan in place. And make sure that you have something as a collateral against the loan even if the bank doesn’t require you to provide a collateral. The next best option is to take an insurance on your loan amount if it is a huge amount. If you have difficulty making payments, the insurance will take care of that till you are capable to make the repayment yourself. This way, you will not default on making payments and hence it won’t get reported in your credit report. It will also help you avoid taking up on the bank’s and lender’s choice of settling the loan. In turn, it will help you from CIBIL mentioning it in your credit report and showing your bad credit behaviour.
When the CIBIL mentions the loan as being settled, the lenders and banks will be vary of you and will not provide you loan. Keep in mind to have a credit score of 750 and above and remember that loan settlement is not a solution. The reason why banks and lenders offer you a settlement is that they know you will not be able to return the money and they settle for whatever you can pay. They will at least get some money from you. Make sure that you do not misuse your credit capability. Borrow within your limits and make sure you have alternate means to repay the loan. Lastly, remember that the settled status stays in your credit report for the next 7 years making it impossible for you to get a loan and it reduces your credit score by up to 100 points.
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FAQs on Loan settlementDo settlements affect my CIBIL report?
If you arrange for a settlement with your bank for a lower amount than what’s due, there will be a mention of this in your CIBIL report. Not having outstanding debt and having a history clear of default is one thing, but having a credit history wherein you’ve arranged to close your loan after a settlement with the bank is another story. All these are categorized and reported separately for the next credit lender to make an informed decision.