Does ‘Loan Settlement’ affects your credit score? The answer to this question is ‘YES’. As per the terms of the agreement between banks and credit bureau, all cases of ‘Non payment of loan in full’ should be reported to the credit bureau. ‘Loan Settlement’ is a situation where bank allows borrowers to pay a fraction of the total loan amount and get NOC letter. But in such cases borrower falls into the category of non payment of loan amount in full. This when reported to the credit bureau affects the credit score of the borrower negatively.
To get an understanding of how debt settlement affects your credit score you need to have a basic knowledge of loan settlement process. It is a process where borrower repay only a part of the total loan amount and get No objection certificate (NOC) from the lender.
Here for an instance, ‘A’ borrowed Rs 5 lakhs from bank and after paying few EMI’s he stopped making payments against his loan due to shortage of funds. After analyzing the financial situation of Mr. A, when bank realized that he may not be able to pay his full outstanding debt. Bank asked him to pay a fraction of the total outstanding loan and get rid from the loan liability i.e ‘Loan Settlement’.
The above illustration explains the process of ‘Loan settlement’, know have a look how this impacts the credit score of the borrower.
Now a days all financial institutions check the credit rating of the applicants for processing loan application. In recent past, banks denied the loan application of the applicants with the credit rating less than 750. Which means ‘Credit Rating’ plays a very important role in everyone’s financial life.
Know after making you understand the importance of credit score in your financial life lets understand how loan “Settlement” can affect your credit score and minimizes your eligibility for further loans.
In case you opt to ‘settle your loan’ by paying a fraction of your loan liability, bank will close your loan and report the incident to the credit bureau. Credit bureau will mark your status ‘Settled’ or ‘Written’ for next 7 years, which is a sign that have not paid your past dues. This reduces your credit score and you go out from the eligibility criteria of getting any kind of loan for at-least next 7 years.