A Settlement Has Multiple Effects When It Comes To CIBIL
When you take a loan, you would plan out how you will repay it within a specific time period. In fact, almost all of us do this. However, it may happen that you may find yourself in a situation, where you cannot fulfill the repayment promise that you made to yourself previously.
Thus, you consult your lender or bank with this problem and they may suggest you one way to get out of it. What it is? It is a onetime settlement of your bank loan. At first, this would seem to you a good choice and you would feel as if the bank or lender has done a favor on you. And, thus, you will instantly grab this opportunity.
However, soon you will realize that your bank loan settlement was not a good decision on your part after all. A bank loan settlement can affect your CIBIL score drastically. It can lower your credit score and thus make it difficult for you to get a loan in future. In order to study this more in detail, let us see how a loan settlement can ruin your credit score.
The procedure of the bank or lender
In case the borrower is unable to repay their loan due to some genuine reasons, the lender or bank suggests them to settle their loan. The bank or lender offers the consumer this option, when they are unable to pay their loan dues till 6 months. This means that after the 6 months are completed, banks or lenders usually offer this choice to consumer.
In such a scenario, the bank or lender considers various things, including the job loss of the consumer, a serious medical ailment that affects the consumer, or accident of the consumer. The bank authorities or the lender talk to the borrower and examine their situation and the authenticity of their problem, after which they decide to cancel the difference between the due amount and the paid amount.
Then, the bank or lender reports the loss of the borrower to the credit agency and release the borrower of their outstanding loan payments. The borrower takes this as a sign of relief and thinks that now he is free of any loan repayments and will not be chased by recovery agents. However, in reality he does not know that there is a heavy price that he has to pay for this in the future.
How loan settlements impact your CIBIL score?
Loan settlements can take a toll on your credit score. This is because when the lender or bank writes off your loan, they report the loss to CIBIL (Credit Information Bureau of India). And, although, the relationship between the borrower and the lender or bank has ended now, the CIBIL does not consider this factor.
Rather than ending the borrower’s transaction, it gives it the name of settlement. And, when a loan is named as settled, it is seen as a bad credit behavior on the borrower’s part. This, in turn, declines the credit score of the borrower by 75 to 100 points.
Furthermore, the loan settlement details are held by CIBIL till 7 years. This means that in case the borrower wishes to apply for a loan in this time period, he or she is very likely to be refused for the loan. Neither the bank nor the lender will give the loan to the borrower after looking at his or her past repayment details in their credit report, which includes the settlement of their previous loan.
What can the borrower do?
If you as a borrower are stuck in such a situation, then you should avoid the settlement of your loan by all means. Instead, look for other ways to pay off your loan, such as take help of your friends or family or liquidate some asset or a part of your portfolio in order to pay off your loan.
You can even ask your bank or lender to extend your loan repayment period, waive the interest for a specific time period, or give you a simpler repayment term. This way you will not have to settle your loan and thus can save your CIBIL score from dropping.