How Personal Loan Settlement Affects Your CIBIL Score?

If you ever find yourself in a money crisis, such as a surprise doctor's bill or a home repair bill, a personal loan can be useful. But what if you were in a poor financial state, and you couldn't afford loan payments? Then you may want to consider a personal loan settlement. Yes, this is relief from some of the anguish, but it will lower your credit score.

In this article, we will discuss what is personal loan settlement, and how your CIBIL score gets impacted if you settle your loan. This will aid you to assess whether it is in your interest to settle your loan.

What Is Personal Loan Settlement?

Whenever there is a default in a loan, personal loan settlement will enable the borrower to repay the loan through a single payment discounted below the due amount. For instance, if a person has an outstanding of ₹1,00,000 and pays ₹60,000, and the lender agrees to receive the payment and close (settle) the account, the lender is closing the loan as settled. The loan will be settled after that payment. This is one option to settle a loan if a blanket payment is not possible due to the financial conditions of the borrower. So understand that "settled" is not necessarily the same as "closed." A closed loan is when you've paid in full the total balance back. A settled loan is when a lender will take a smaller balance.

When Should You Think about Personal Loan Settlement?

You might think about personal loan settlement if:

You became unemployed or had a loss of income source.

You have urgent or excessive medical bills.

You are severely financially stressed.

You cannot repay your loan even after getting it rescheduled.

Settlement must be your last resort. Before opting for it, attempt to find other alternatives such as EMI reduction, loan rescheduling, or seeking a temporary moratorium on payments.

Possible Effect on Your CIBIL Score:

Your CIBIL score shows how creditworthy you are. This score is a number between 300 and 900. If you have a score of 750 or above 700, most likely, you’ll get a loan at a respectable interest rate.

When you engage in personal loan settlement, your lender reports the information to all the credit bureaus, including CIBIL. CIBIL records your account status as "settled" as opposed to the normal status of a "closed" account. This indicates a borrower that repaid only a portion of their loan repayment.

As a result of going through loan settlement, your CIBIL score is lowered. A settled account lowers your score between 75 - 100 (or more) points, depending on your credit history. This new low score will make future access to loans or a credit card more complicated.

What is the average time it Take for a "Settled" Comment to disappear?

The "settled" comment is carried in your CIBIL report for up to 7 years. From that point on, it increases your risk as an applicant to lenders. If you do wish to obtain a loan, the comment must be deleted or amended, unless you can demonstrate financial stability.

Can You Improve Your Score After Settlement?

Yes, you can. Though it takes time, your CIBIL score can be improved by following these steps:

Pay all future EMIs on time – Whether it’s a credit card, car loan, or home loan, timely payment helps rebuild your score.

Keep your credit usage low – Use only a small part of your available credit limit.

Avoid taking too many loans at once – Applying for multiple loans reduces your score.

Ask the lender to update your status – If you manage to pay the full amount later, request your lender to mark the loan as “closed” instead of “settled.”

Should You Go for Personal Loan Settlement?

Personal loan settlement should only be considered when:

You have no other repayment option.

Your financial condition is not likely to improve soon.

You are ready to accept a lower CIBIL score for the short term.

If you are uncertain, don't hesitate to consult with an expert. A reputable financial expert or settlement agency Guardian Financial Experts will provide guidance through the process. They help negotiate with lenders to settle your debts and provide you with the ramifications regarding your credit profile.

Final Thoughts

Although a personal loan settlement may provide you with short-term debt relief, it will come at the cost of your credit health. It will definitely reduce your CIBIL score, and can influence your eligibility to borrow money in the future. If you are considering this option, just understand the impact of the settlement and consider other options if at all possible.

If you still feel that a settlement is the best option for you, then begin focusing on repairing your credit in the long term. With time, taking action, and with responsible behavior, your credit rating can be rebuilt, and you can become creditworthy again.

Remember that it is always best to act sooner rather than later and have an open conversation with your lender if you find yourself in a missed payment situation. The clearer you are with your lender, the better options are available for you.