Loan Settlement vs Loan Closure

What is Loan Settlement? 

In case you find it difficult to pay the entire loan amount that is due, you can negotiate with the lender to pay a portion of it. This process is called loan settlement. 

Loan settlement is considered only when you are facing financial difficulty and the EMIs cannot be paid regularly. The amount that is paid will usually be lesser than the amount that is due. 

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Even though loan settlement will bring financial relief immediately, there are several drawbacks to it. The loan will show as ‘Settled’ and it will have a negative impact on the credit report. In case of loan settlement, you may find it difficult to avail a loan in the future. 

Difference between Loan Closure and Loan Settlement 

Category	Loan Closure	Loan Settlement
Charges	May include foreclosure charges	May involve penalties or settlement fees
Documentation	NOC or Loan Closure Certificate issued	Settlement letter provided
Impact on Credit Score	Positive impact	Negative impact
Future Loan Eligibility	Easier to get loans in future	May lead to loan rejections
Repayment	Full amount repaid	Partial amount paid after negotiation

It is important to understand the differences between loan closure and loan settlement as it can help in managing your finances in an effective manner. Loan closure can help in improving your credit score, while loan settlement can have a negative impact on your credit score even though it may provide immediate financial relief. 

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FAQs on Loan Settlement vs. Loan Closure

• What is the difference between loan closure and loan settlement?

  Loan closure happens when a borrower repays the entire outstanding amount (either through EMIs or lump sum). Loan settlement is when a borrower negotiates with the lender to pay only a part of the total outstanding due to financial hardship. Loan closure improves credit score, while settlement negatively affects it.

• Does loan settlement affect credit score?

  Yes, loan settlement significantly impacts your credit score negatively. It indicates that you failed to repay the full loan, which reduces your creditworthiness for future loans.

• What are the benefits of loan closure?

  Loan closure improves your credit score, enhances your credit history, and makes it easier to get loans in the future. You also receive a No Objection Certificate (NOC) confirming the loan has been fully repaid.

• Is loan settlement a good option?

  Loan settlement should only be considered as a last resort when you are facing severe financial difficulties. While it offers immediate relief, it damages your credit score and may impact future borrowing ability.

• What documents are provided after loan closure?

  After loan closure, the lender provides a No Objection Certificate (NOC) or Loan Closure Certificate. This document confirms that all dues have been cleared and the loan is officially closed.

• Can I take a loan again after settlement?

  Yes, but it may be difficult. Since loan settlement affects your credit score negatively, lenders may consider you a high-risk borrower and either reject your application or offer higher interest rates.

• How long does it take for a closed loan to reflect in my credit report?

  It usually takes 30–45 days for the loan closure status to reflect on your credit report. Make sure to check your report to ensure the loan is marked as “Closed.”