Loan Settlement Impact on CIBIL Score

A loan settlement is an arrangement between the borrower and the bank. It allows for a one-time settlement when genuine issues like job loss or health crises hinder timely repayments. Typically offered after 6 months of non-payment of EMIs, this option involves the bank considering the outstanding amount settled, particularly if the borrower has experienced a significant illness, accident, or unexpected job loss.

If the loan is due in over 3 months, it is considered a non-performing asset. After 6 to 9 months of the due date of the EMI payment, the bank may write off the loan. If an EMI settlement occurs before such a written-off, it is termed ‘settled’. If the EMI settlement happens after the write-off, it is considered a ‘post-write-off settlement’ in the individual’s credit report. In either case, it impacts the borrower’s credit score.

Loan settlement leads to a significant drop in your CIBIL score of up to 100 points, potentially affecting future loan applications for up to 7 years. When a bank writes off a portion of the outstanding loan amount and offers a one-time settlement, this information is reported to credit bureaus like CIBIL. Unlike a closed account, a settled account is marked in the credit report, causing a deduction in the CIBIL score.

Once a settlement is marked on the credit report, removing it becomes challenging. However, borrowers can take steps to mitigate the impact and improve their creditworthiness over time:

• Maintain Financial Discipline: Consistently practising good financial habits, like timely bill payments and responsible credit card usage, can gradually improve the credit score

• Repay Other Loans: Repaying other outstanding loans promptly can help boost the credit score and offset the negative impact of the settlement

• Clear Credit Card Dues: Ensuring no overdue payments on credit cards contributes positively to rebuilding creditworthiness

• Check Credit Report Regularly: Monitoring the credit report allows individuals to track improvements and identify any discrepancies that may need attention

Opting for a one-time settlement should be the last resort due to its adverse effects on the CIBIL score. Exploring alternative options, such as negotiating loan terms or seeking an interest waiver, is advisable. Having a contingency plan in place when getting a loan can also help navigate unexpected financial challenges without resorting to settlements.