The tag for loan settlement sticks to those handling it in a way that it can’t be removed. If you’re also making this mistake, understand these points.
Loan Settlement: Many people don’t know that loan settlement negatively impacts their credit score. A settlement tag on your loan account can make it difficult to get a loan in the future.
When there’s suddenly a need for money and no immediate solution, taking a loan becomes necessary. However, due to the availability of credit cards and instant loans, taking a loan doesn’t seem like a hesitation anymore. But if the burden of debt increases or the financial situation doesn’t support it, this isn’t the right approach. In such situations, people start thinking they should pay off the bank. But in this case, your credit score might suffer. But what is loan settlement and how can it affect your credit score? Let us explain.
What is Loan Settlement?
If you’ve taken a loan and, for some reason, are unable to repay it as per the original terms and conditions, you can request an option from your bank or lender. Your bank might offer you the option to settle your loan account by making a one-time payment. This amount should be less than the outstanding loan amount. By paying this amount, you can clear your debt. Your loan account will be shown as ‘Settled’ status. Please note, this isn’t a closed account; it’s a managed account.
Will the Credit Score be Affected?
Many people are unaware that loan settlement has a negative impact on their credit score. A settlement tag on your loan account can make it difficult for you to borrow in the future. If you’re considering loan settlement, be prepared for negative consequences. You might not get loans at competitive interest rates. If you want a credit card, you might have to settle for a lower credit limit than you need.
The Tag of Debt Settlement Will Stay
The tag of your settled loan can stay on your CIBIL credit report for up to seven years. During these years, whenever you apply for a loan, credit card, or any other form of credit, the lender will consider your settlement status before approving the loan. This situation implies that you were not capable of repaying your previous loan and could be considered a risky borrower, meaning the bank might lose money.
Can Settlement Tag of Loan be Removed from the Report?
If you want to remove the settlement tag from your CIBIL credit report and improve your credit score, you can repay your outstanding loan to your lender. Ask your lender for a ‘No Dues Certificate.’ This information will be provided to the credit bureau by the lender, leading to an improvement in your credit score (CIBIL Credit Score).
