For NPA Customers: How Settlements Affect the CIBIL Score?

  

There are times when you have to borrow money to meet unprecedented expenses. You take a personal loan from financial institutions like a bank on the condition of paying it in equated monthly installments (EMI) for certain number of years. Your situation changes, and you find it difficult to repay the loan for some genuine reasons. 

You approach your bank, which offers you an option of one-time loan settlement. A bank or a lending institution will offer you this settlement option if you have failed to repay the EMI for 6 months. Some reasons that the bank may consider for this option are job loss, accident and serious medical conditions. The authorities concerned at the bank will have detailed discussions with you, and after considering the situation they will decide a certain amount for settlement, which you have to pay. Once paid, the bank reports that the account is ‘settled’.   

Most customers mistake the term ‘loan settlement’ for ‘loan closure’. Nevertheless, both these terms are not the same. A loan closure is paying off the monthly instalments until the last payment as per the schedule; thus, closing the loan account. A loan settlement, unlike the loan closure, has the status marked as ‘settled’, which has an adverse CIBIL impact on your credit score, which is dropped by 75-100 points.

How Does the Loan Settlement Impact on CIBIL?

A financial institution, which writes off a loan or reports a loan as ‘settled’, will inform the case to CIBIL, as well as other recognized rating agencies. Though there are no further transactions between the lender and borrower as the account is terminated, the loan settlement effect on CIBIL is negative as the loan account closure is not a usual one. The term ‘settled’ is generally regarded as a borrower’s negative credit behaviour, and therefore, his or her credit score drops.

The credit rating of the borrower is marred by this behaviour, and it will be on CIBIL records for over 7 years. During the period if the said borrower applies for a loan, he or she may not be qualified for it as the lender may doubt the borrower’s repaying capacity and the CIBIL score, and reject the loan application owing to the past record of non-payment.

Is There Any Solution for the Borrower?

Most borrowers hardly know what happens when they arrive at the decision of settlement. Neither they are aware of the CIBIL effect on their credit score or ratings. They will find it difficult to apply for a loan for at least 7 years as until this time the credit-rating agencies like CIBIL will have their past records in their repository. 

Where you find it difficult to repay your loan for any reason, it is better to not opt for the one-time settlement option for loan settlements effect on CIBIL will stall all your chances of availing a loan in future. You can look for other options such as selling a part of your assets or stock, or ways to increase your income to raise the amount for loan repayment. If not, you can talk to your bank or lender to either revise your repayment terms to give some extension of time or restructure the monthly instalments by reducing the interest rate or waiving off the interest to enable you to pay the instalments comfortably.

In case your CIBIL score is already affected, you can improve it by paying the outstanding or written-off amount in your loan account and get a No Objection Certificate (NOC) from the lender and inform the credit bureau on the CIBIL’s website about it. This will help change the status of your loan account to ‘closed’ from ‘settled’.