The Impact of Loan Settlement on Your CIBIL Score & Future Loan Approvals
Should You Settle a Loan or Pay It Off Completely? Understanding the Difference
A good credit score is essential for securing loans at favorable terms, but many borrowers find themselves in situations where they are unable to repay their debts. When this happens, loan settlement might seem like an easy way out, but it comes with serious consequences for your CIBIL score and future loan approvals.
In this article, we will discuss:
What loan settlement means How it affects your CIBIL score Whether you should settle a loan or pay it off completely Alternative solutions to protect your creditworthiness
1. What Is Loan Settlement?
Loan settlement is a process where the borrower negotiates with the lender to pay a reduced amount instead of the full outstanding loan balance.
How Does Loan Settlement Work?
- If you default on EMIs for several months, the lender categorizes your loan as a Non-Performing Asset (NPA).
- Instead of writing off the loan completely, the lender offers a settlement option, where you can pay a lump sum that is lower than the actual outstanding amount.
- Once paid, the lender closes the loan account and marks it as “Settled” in your credit report.
While this may seem like a relief, loan settlement negatively impacts your CIBIL score and future creditworthiness.
2. How Does Loan Settlement Affect Your CIBIL Score?
When a loan is marked as “Settled” instead of “Closed” (fully paid), it raises red flags for future lenders.
Major Impact on CIBIL Score:
- A settled loan lowers your CIBIL score by 50 to 100 points or more.
- This record remains on your credit report for up to 7 years, affecting future loan approvals.
Difficulty in Getting Future Loans:
- Banks and NBFCs see “Settled” status as a sign of financial instability.
- You may struggle to get personal loans, home loans, or credit cards in the future.
- Even if approved, lenders may charge a higher interest rate due to the increased risk.
3. Loan Settlement vs. Loan Closure: Key Differences
| Factor | Loan Settlement | Loan Closure (Full Repayment) |
|---|---|---|
| Outstanding Loan Paid? | Partially paid (discounted amount) | Fully paid as per original terms |
| Credit Report Status | “Settled” (Negative impact) | “Closed” (Positive impact) |
| Effect on CIBIL Score | Drops significantly | Improves or remains stable |
| Future Loan Approvals | Harder to get loans | Easy to get new loans |
| Impact Duration | Up to 7 years | No negative impact |
Conclusion: Always prefer paying off the loan completely rather than settling it.
4. Should You Settle a Loan or Pay It Off Completely?
If you are struggling with loan repayment, consider these better alternatives instead of settlement:
Restructuring the Loan:
- Request your lender to extend the loan tenure to reduce EMIs.
- Opt for a moratorium period if available.
Opting for Loan Refinancing:
- Transfer your loan to another bank with a lower interest rate.
- Consolidate multiple loans into a single manageable EMI.
Negotiating for a Partial Payment Without “Settlement” Status:
- If the lender offers a discount, request them to mark the loan as “Closed” instead of “Settled.”
- Ensure they provide a No Objection Certificate (NOC) after full payment.
Using Savings or Liquidating Assets:
- Use emergency savings or liquidate non-essential assets to clear the loan completely.
Best Option: Always try to pay off the loan completely instead of settling it, even if it takes longer.
5. What to Do If You Have Already Settled a Loan?
If you have already settled a loan and your CIBIL score has dropped, follow these steps:
Check Your Credit Report: Download your CIBIL report and verify if the loan is marked as “Settled.”
Contact the Lender:
- Request them to remove the “Settled” status after paying any remaining dues.
- Ask for an updated No Objection Certificate (NOC).
Reach Out to Nodal Officers:
- If the update is not reflected in the credit bureau, contact the Nodal and Principal Nodal Officer of both:
- Lending company (bank/NBFC)
- Credit bureau (CIBIL, Experian, Equifax, CRIF High Mark)
File a Complaint with RBI:
- If no action is taken, raise a complaint with the Reserve Bank of India (RBI) through their grievance redressal system.
Rebuild Your Credit Score:
- Make all future loan/credit card payments on time.
- Keep your credit utilization below 30%.
- Apply for a secured credit card to gradually improve your credit score.
6. Final Verdict: Should You Settle a Loan?
Avoid loan settlement unless absolutely necessary. Always aim to close loans completely for a better financial future. If you must settle, ensure you negotiate for a “Closed” status instead of “Settled.”
At Fair Finance, we help borrowers understand their loan options and protect their financial stability.
Conclusion:
Loan settlement might provide short-term relief, but it damages your credit score and makes future borrowing difficult. Instead, look for alternative solutions like loan restructuring or refinancing to maintain a strong financial profile. Always prioritize full loan repayment to secure a financially stable future.
Take the Next Step!
Looking for the right loan but unsure which one suits you best? Fair Finance offers expert consultation to guide you through your loan options and ensure you make an informed decision.
Visit our 
website: www.fairfinance.in
Email us: fairfinance.in@gmail.com
Call us: +91 9123309198
