How Loan Settlements Negatively Affects CIBIL Score?

The repayment cycle for a loan you take is pre-decided during the loan agreement. If you are unable to repay as committed, you may approach the lender and opt for one time settlement. The bank may allow you to pay all the dues together than giving in instalments, if you are suffering from a genuine problem for not keeping up with payment commitments.

Though the decision of settling loan may seem as a relief to you, it may actually affect your credit score. Why? Here is the answer:

  • The bank will report to CIBIL when writing off your loan, and CIBIL will consider that your loan as "settled"
  • A loan when termed as "settled" leaves a negative credit behaviour impression, causing a drop in credit score by 75 to 100 points
  • Your credit behaviour will be held on records with CIBIL for more than 7 years and when you next approach a bank for loan, the effect of loan settlement will reflect in report
  • The bank may not consider you the right candidate for future loan prospects and may reject your loan application

How to pay off a Loan that you can't repay on Time?

One-time-settlement for loans must not be the priority option for a borrower who wishes to pay off debts, which they find difficult to repay. Instead, try liquidating assets or take a top-up loan on a lower interest rate or a suitable EMI scheme.

  • If you want to negotiate with bank, try to choose a new EMI pattern that you can meet up to.
  • You can ask the lender to extend the repayment tenure than settling off the loan. Make an effort to repay the loan on the newly-decided scheme and keep a check on your credit score closely for the next 12 to 24 months.
  • Borrow from friends or family to pay off debts in case negotiation with banks does not work.
  • Sometimes converting an unsecured loan to a secured one with the bank may give you some leverage in negotiating loan terms.