When you apply for a loan, it's important to be aware of your loan repayment capacity. In case you are unable to repay your loan due to unavoidable circumstances, then one of the options available is loan settlement.
However, this is not a recommended option due to various reasons, one of which includes the adverse impact on your credit score.
Personal loan settlement process, also known as personal loan defaulter settlement refers to an agreement between a lender and a borrower wherein the loan is ‘settled’ by repaying only a part of the loan.
Based on the number of EMIs that have been unpaid, a lender may agree to waive the processing fee or penalty for delayed payment or in extreme cases, a part of the principal amount. As mentioned previously, this will depend on the borrower’s reason for defaulting as well as the amount that is yet to be repaid.
Once the loan settlement process is completed, the lender will close the loan and mark it as ‘settled’.
No! Not unless there is absolutely no other option. At first glance, loan settlement may look like an easy way out of not repaying the loan, but the consequences are detrimental. This is the case for all loans, including personal loans.
Instead of opting for a personal loan settlement process (or any other loan), try to go for some of the options given below-
Please bear in mind that going for a loan settlement process should be considered only when you have exhausted all other options.
When you opt for a personal loan defaulter settlement, it negates the original credit agreement between you and your lender. Also, when your lender reports the same to credit rating agencies as ‘ settled’ instead of ‘paid as agreed’ or ‘paid in full’- it will have a negative impact on your credit score, and discourage other lenders from lending you credit in the future.
Did you know that settling a loan may hurt your credit?
While the loan might have been ‘closed’, your name may be on the list of loan defaulters. Besides, your lender will report the same as ‘settled’ to the credit bureaus which has a detrimental impact on your credit score.
You will be considered as a risky borrower which will prevent lenders from providing loans to you easily.
The very act of opting for loan settlement has a negative impact on his/her credit score. A ‘settled’ loan is considered as negative behavior by credit rating agencies as the borrower has failed to repay the entire loan amount which brings down his/her creditworthiness.
Borrowing for such individuals will be very hard in the future and even if they do avail a loan, it will be at very high interest rates or other unfavourable conditions. For a borrower, it takes nearly seven years or so to reestablish a positive score and improve his/her credit history.
Loan closure is a term that refers to the closing of an existing loan account after the borrower repays the loan fully on time. This will have a positive impact on one’s credit score.
On the other hand, loan settlement refers to the process of a lender forgiving a part of the borrower’s loan amount in order to help the borrower repay the loan. Although the loan account is technically closed, since the amount was not fully repaid, this process will have a negative impact on the borrower’s creditworthiness and future borrowing prospects.
Being a little cautious while opting for credit will help you avoid multiple problems related to your overall financial management. It’s important to keep in mind the following points
A low credit score always exposes a lender to a high risk of default. Therefore, banks or lenders are often unwilling to offer credits to individuals who have a low credit score and who have defaulted on loan payments in the past.
Hence it is very important to maintain a good CIBIL score to increase your chances of receiving credit easily at reasonable rates. You can build up a good credit history by practicing the following –
Here are some other steps you can take to increase your credit score.
To know more about your credit score and the impact of the same on your finances, check out our extensive article on this.
Opting for loan settlement may seem like an easy way out if you are unable to repay your loan on time but bear in mind that a loan settlement process will have a severe impact on your credit score. Additionally, you may not be able to avail loans in the future affordably. Settle your loan only if you have no other option. One way to prevent this entire situation is to avail affordable loans and an amount that you are confident of repaying. If you are looking for instant online personal loans at competitive rates, visit the Money View website or download the loans app to apply today.