Loan Settlement is often mistaken with the term loan closure. But these are
two different terms. Loan settlement means when a borrower fails to repay a loan
due to unavoidable circumstances. Debt settlement, debt relief, or debt
resolution are other terms used for loan settlement.
On the other hand, when individuals pay their monthly instalments on time and
repay the loan as per the loan repayment schedule given to them at the time of
disbursement, the loan account is termed as 'loan closure'.
How Does Loan Settlement Work?
In the case of a loan settlement, the borrower needs to inform the lender about
the unavoidable situation and ask for some time to start repayments. If the
lender finds that the borrower is genuinely unable to repay the loan dues, a
settlement offer is made. The lender may grant a one-time settlement option.The
reason may be an illness, injury or job loss. After settling the loan in one go,
the loan status will be recorded as a settled loan in the borrower's credit
Since it is not a usual closure,loan settlement shows negative credit behaviour
with a drop in the credit score.
Unsecured loans are settled by lending instaitutions under certain circumstances.
Settling a secured loan is generally a tough proposition, which in most cases
may not be feasible, especially like a home loan. Apply online for a loan as an
informed user to avoid situations where you are found asking for a loan
How to Improve CIBIL Score After Settlement
A Good credit score of 700+ helps lending institutions decide whether a person
is creditworthy and can repay the loan or pay the credit card bill on time. A
high credit score means the better the chances to secure credit at favourable
terms. Rebuilding the credit score is inevitable.
Here borrowers can understand how to improve CIBIL score after settlement:
- Convert 'Settled' to 'Closed' Status
Changing the loan account status from 'Settled' status to 'Closed' with the
lender is one of the simplest ways to improve the credit score. Pay off all
your debts once to change the status within the stipulated time. It is a
6-month period and can be extended depending on the seriousness of the
matter. If the debt is really high, talk to the lender for negotiated terms.
- Make Regular Payments
Repayment history is an important factor that plays a part in determining
somebody's credit score. One-third of a borrower's credit score depends on
the length and clean credit history. One of the most effective ways to
rebuild a credit score is to make all credit card payments fully and before
the due date. It gives an immediate and significant impact on credit scores.
- Reduce the Credit Utilisation Ratio
Experts suggest keeping the credit utilisation ratio low, ideally 30%. It
will not only help improve the credit score but reduce debts. A small amount
of debt can be paid easily in full and on or before the due date which
ultimately adds to the borrower's creditworthiness and adds to credit score.
- Discontinue Using Full Credit Limits
Many borrowers aim at improving their credit profiles by holding back on
fully utilising the assigned credit limits on their cards. Keep in mind that
borrowers have to use their credit to rebuild their credit scores. It is
necessary that borrowers possess a long and spotless credit history. Their
credit score will improve only if they show responsible credit behaviour. A
lack of credit activities may lead to a drop in your score.
- Accept Pre-approved Increased Credit Limits on Cards
If individuals are offered increased credit card limits, they should accept
them. Previous sound credibility with an institution can help borrowers to
enjoy a higher credit card limit. An increased credit limit, especially on
old cards, signifies the reliability of the borrower and adds to their
- Avoid Making Loan Queries
After the loan settlement, borrowers should not consider taking further
action to get credit. It indicates a credit-hungry prospect. Avoid making an
application or placing a query for a new loan for a few months of the loan
settlement transaction. It may lead to loan rejection and can further tumble
their credit score. Just focus on repairing a hurt credit score and do not
seek further credit.
Borrowers must first try to avoid situations like loan settlement and try to
negotiate on extended loan tenure with the lender. If the situation is
unavoidable, follow the tips given above to rebuild the credit score.