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Loan/Debt settlement is also known as debt arbitration, debt negotiation or credit settlement. It is an approach to debt reduction in which the debtor and creditor agree on a reduced balance that will be regarded as payment in full. During this period of negotiation, all payments by the debtor are made to the debt settlement company, which typically withholds payments to the creditors, even if the debtor has paid a lump sum or made payments. Once all the debtor’s accounts are in default due to non-payment, the debt settlement company has the leverage to force the debtor to accept a reduced lump sum payment as settlement. The debtor’s credit rating or credit score goes down significantly due to the default, especially if the debtor was not behind on payments before the negotiation period commenced. Even though the accounts are “settled”, the default appears on the debtor’s credit record for seven years.
If the lender is convinced that your reason for non-payment is genuine, he may consider offering a 6-month non-repayment period. This option will be offered only if you agree to settle the loan in one payment. The lender will write off a certain amount so that it is easier for the borrower to settle up the loan.
The amount that will be written off depends on the severity of the scenario and the repayment capabilities of the borrower. Due to this agreement for an amount lower than the actual outstanding amount, the status of the loan will be marked ‘settled’. In contrast, if the borrower had paid the outstanding balance completely, the status of the loan would be recorded as ‘closed’.
Whenever a lender decides to write-off your loan, they immediately report this case to the CIBIL and other credit bureaus. Though the loan transaction comes to an end in the form of settlement between the borrower and lender, but it is still not considered as ‘Closed’ by CIBIL, they term it as ‘Settled’. When a loan is termed settled, it is viewed as negative credit behaviour and the borrower’s credit score drops by approximately 75-100 points. If during this period, a borrower applies for any fresh credit, it might get difficult for the lenders to approve such applications.
When a bank or the lender is writing off a loan, they will report it to CIBIL. Though the relationship between the bank or the lender and the borrower has terminated, CIBIL doesn’t take that into consideration. Instead of closing the transaction, they term it as settled. When a loan is termed settled, it is viewed as negative credit behaviour and the borrower’s credit score drops by 75-100 points.
The CIBIL holds this record for over 7 years. So, if the borrower has to take a loan during that period, it is likely that the lenders will be varying of the borrower and try and stay away from giving the borrower any loan. The banks and lenders mainly look for the borrower’s past repayments before considering offering him a loan. And if the borrower has the settlement in his credit report, the banks and lenders will reject the loan.
If the borrower is finding it hard to meet the repayment of loan due to some genuine issue, then the lender or the bank offers the borrower a one-time Settlement of the loan. Bank will consider this option only if they are convinced that the borrower is facing any genuine problem. If the borrowers fail to make payment for six months, the banks or lender will start investigating the reason behind your unwillingness to make payment. Situations such as job loss, accident or medical emergency will be considered genuine reasons. The bank representatives sit with the borrowers and analyse his situation and agree to write off the difference between the amount that has been paid and the amount outstanding towards them. The amount that is outstanding will be written in the loss book of the bank and the borrower will be set free. After this step, recovery agents won’t come to borrower’s home and he will no more receive any recovery calls. The borrower may find this offer quite relieving but its impact on your CIBIL score will let you regret in the future.
When a bank or lender writes-off the debt of the borrower, it will be reported to the CIBIL agency and the agency will view it as a negative point. CIBIL will not consider it as closed account; instead they will term it as settled. When a loan is termed as settled, it will subtract a few points from your CIBIL score. The borrower’s credit score will drop by 75-100 points and will hold this record for the next 7 years. So, if the borrower is planning to take a loan during this period, no lender will allow him to do so due to his CIBIL score. The bank or lender takes a look at the borrower’s CIBIL score before offering him a loan and if the past record shows any settlement or non-payment, his loan is likely to get rejected.
The biggest problem with this settlement is that people are less aware of the details of this settlement. Borrowers regret their decision of settlement later. They do not realise that it damages your credit score more than you can imagine. It makes it hard for the borrower to apply for a loan for the next 7 years as CIBIL will hold this record for that period. Customers must be aware of all the pros and cons related to this settlement and one must do good research and study before opting for this settlement option. Knowledge is the biggest strength that the customers have. So, be well aware of all the consequences and process of settlement to avoid any regrets later. Read all the terms and condition carefully and never forget to consult your agent for any type of queries.
If, as a borrower, you are facing any problem in repaying your loan due to reasons such as unemployment, accident or any serious medical conditions, do not think that one-time settlement is your first and only option. Treat this offer of your lender as your last option as this is one of the most harmful ways to settle your loan. There are many other options that can bring you out of this dilemma. Ask your family and friends for loan and avoid settlement by repaying the amount. You can even talk to your lender or bank and request them to extend the repayment time limit or waive the interest for a certain period. One must avoid settlement by all means and try their best to repay the loan on time.