Does Loan Settlement Ruin CIBIL Score?

Whenever you borrow a loan, it’s important to have a plan to repay it. However, sometimes people are unable to repay the loan on time. This can be due to business failure, high interest rates, sudden tragedies, etc. People may try to resort to loan settlement to solve the problem.

However, contacting the lender or bank to settle a loan might be a blunder. It harms your CIBIL (Credit Information Bureau (India) Limited) score and prevents you from obtaining a loan for many years. Many people hurry to make extreme decisions without being aware of the consequences.

A CIBIL score is essential to determining your financial status. It is largely dependent on your monetary behavior. This article will explain the drawbacks of loan settlement and why you shouldn’t choose it. 

Meaning of Loan Settlement

Also known as “debt relief,” this is a process of financial negotiation. The borrower tries to agree with the lenders to settle on a sum less than the entire amount. Typically, a “One-Time Settlement” offer is provided by the lenders. Eventually, both parties will reach a common ground on the debt owed. The loan’s status will be stated as “settled” in the credit report. The differential sum will be officially dismissed. 

Now the question arises: how does this harm CIBIL Score? 

How Does Loan Settlement Affect CIBIL Score?

The biggest impact is on the prospects of obtaining loans in the future. The possibility of getting a favorable interest rate is tarnished. This is because loan settlement lowers the CIBIL score. Most borrowers are unaware of how loan settlements diminish their credit score. If you choose to pay off your debt, you should be aware that your CIBIL credit score may suffer as a result. Typically, a loan settlement can lower the CIBIL score by 80–100 points. That’s quite a lot of deduction. Therefore, your profile as a borrower will suffer a lot of damage. 

A settled debt’s status can be seen for up to 7 years on the CIBIL credit record. This is a long tenure. Therefore, if you apply for a loan during that period, you will probably not get the desired results. It’ll be unfortunate if someone in urgent need of revenue doesn’t avail of it. The banks and money lending companies will assess your CIBIL score. If it appears that you will be unable to repay the original amount, the bank may impose conditions on the loan. These include a higher rate of interest, a shorter tenure, collateral, etc. In the worst case, the bank can reject the loan application.

What Are the Solutions Then?

By now, you are aware of the drastic results of applying for a loan settlement. It’s natural for you to want a solution to the situation. We will consider two cases for this. Firstly, you’ll learn what can be better substituted for loan settlement. The other case will discuss ways to increase the CIBIL score if you have already applied for a loan settlement.

How to Avoid Loan Settlement?

Since applying for loan settlement should always be the last resort, here are the ideal substitutes:

1. Try to sell some valuable assets to raise enough money. These can include gold, automobiles, jewelry, etc.
2. Liquidate a sufficient part of your investment or portfolio.
3. Request the bank or lender increase the tenure to meet your needs.
4. Request the bank to reduce the rate of interest.
5. Get an insurance policy on your loan amount before applying for it. If you cannot acquire sufficient cash to pay off the debt, it’ll be handled by the Insurance company. Thus, you can avoid payment defaults and prevent your credit record from reflecting them. Additionally, it will assist you in avoiding accepting the lender’s and bank’s offers to settle the loan. 

What to do to Increase the CIBIL Score if the Loan is Settled?

If the loan settlement is done, you should take immediate steps to improve your financial status. Loan settlement will inevitably lead to a deduction in the CIBIL score. Therefore, a proper plan is needed to increase it again. The following steps will help you improve your credit profile: 

1. Make sure that all your previous dues (if any) are cleared. These are the biggest hindrances to maintaining a good CIBIL score.
2. Discard the credit cards that you don’t use frequently. However, remember to keep your first one with you. It is not uncommon for unused credit cards to affect the financial status of an individual.
3. Maintain an ideal Credit Utilisation Rate (CUR). This falls around 30% (0.3) or below. Your CUR is a part of the credit limit used against the amount granted. Make sure not to overuse the credit capability. Doing otherwise ruins your credit profile and decreases your CIBIL score.
4. Seek help from a financial adviser. Piramal Finance will provide you with some of the most reliable ones. 
5. Do not apply for a new loan for a few months.

Conclusion

You should always be cautious about borrowing the loan amount, depending on your financial capability. It is this mistake that often leads people into difficult situations. Always analyze the loan schemes offered by different banks and make your choice. If possible, get the required help from a financial advisor. Loan settlement has a negative impact on an individual’s financial situation. You need to realize just how important the CIBIL score is for your monetary requirements. Nearly every bank assesses it before considering granting you a loan. Tarnishing reduces the chances of getting a loan in the future. As a result, in the event of financial difficulties, keep loan settlement as a last resort.

For more details, you can visit our website, Piramal Finance. We will be more than pleased to answer your queries.