You could have planned out your payback for a set amount of time when you were getting the loan. But it so happens that you find yourself in a situation in which you are unable to meet the pledge to make the repayment, and this puts you in a difficult position. You take your issue to the bank or other lending institution, and they can provide you with the option of a One-Time Settlement to resolve it. To you, it will appear to be a favour, and you will pounce at the opportunity to accept it and do so. However, are you aware that doing so will have a negative impact on your CIBIL score?
There is an effect on the CIBIL score caused by loan settlements. CIBIL will be informed whenever a debt is discharged, regardless of whether it was written off by the lender or the bank. CIBIL does not take into account the fact that the borrower’s previous connection with the bank or other lenders has come to an end. They don’t really complete the deal; rather, they refer to it as “settled.” When a loan is paid off in whole, this is considered to be poor credit behavior, and the borrower’s credit score might decrease anywhere from 75 to 100 points as a result. This record has been held by CIBIL for more than seven years. Therefore, if the borrower has to take out a loan during that time period, it is probable that the lenders will be wary of the borrower and will make every effort to avoid granting the borrower any kind of loan.
Before contemplating giving a borrower a loan, financial institutions like banks and lenders primarily look at the borrower’s history of making repayments. The loan application will also be turned down by the financial institutions if the borrower has a settlement shown on his credit record.
Lack of awareness on the part of the borrower
Borrowers who find themselves in a difficult circumstance often take advantage of the Time Settlement offer, even if they are ignorant of the impact the offer would have on their credit score. They are unaware that doing so will hurt their credit score in ways that are beyond anyone’s ability to fathom. Due to the fact that CIBIL will maintain the record for the following seven years, the potential borrower may have a difficult time obtaining a loan during that time.
Escape hatch for the borrower
If you are having trouble repaying your loan due to factors such as unemployment, if you have been in an accident, or if you are suffering from a severe medical condition, do not immediately accept the Time Settlement option that your lender or the bank may offer you. If you are having trouble repaying your loan due to these factors, do not immediately accept the Time Settlement option. Remember that the settlement will have a negative impact on your credit score. You might, as an alternative, investigate the possibility of paying off your debt by selling off a portion of your investment portfolio or another asset. If you are unable to do that, communicate with the people closest to you, such as your family and friends. If at all possible, you should avoid settling down.
If you have no other choice, then your only remaining alternative is to accept the settlement. You might, however, talk to your lender or bank about extending your payback period, giving you better repayment terms, or waiving the interest for a specific amount of time. These are all options that are available to you.
After reaching a conclusion with your lender or the bank, you should make it a point to check both your credit score and your credit report in order to determine where you stand. As soon as you find out what your score is, you should make every effort to return all of your loans and continue to behave in a responsible manner about your credit. Within the next 12 to 24 months, this will increase your credit score to a higher level.
When taking out a loan, having a backup plan that you can fall back on is the next best thing you can do. And even if the bank doesn’t ask you to give collateral for the loan, you should still make sure you have something to put up as security in case you default on the loan. If your loan is for a significant amount of money, the next best thing you can do is have it insured against default. If you are having trouble paying payments, the insurance will take care of that until you are in a position where you can make the repayments on your own. By doing things in this manner, you will avoid falling behind on your payments, which will prevent negative information from being added to your credit report. It will also assist you in staying away from the option of paying the loan that is provided by the bank and the lender. In turn, this will assist prevent CIBIL from noting it in your credit report and displaying your poor credit behavior to potential lenders.
When the CIBIL reports that the loan has been paid off, lenders and banks may be wary of providing you with more credit and may even refuse to do so. Remember that you must have a credit score of 750 or more, and keep in mind that loan settlement is not a solution to your problem. Because financial institutions like banks and lenders are aware that you will not be able to repay the money, they will negotiate a settlement with you for an amount that is less than what is owed. At the very least, they will receive some money from you. Make sure that you are not abusing the credit that is available to you. Borrow only up to your credit limit, and be sure you have other resources available to cover the cost of the loan. Last but not least, keep in mind that the settled status will remain on your credit record for the following seven years, making it hard for you to obtain a loan while also causing a reduction of up to 100 points on your credit score.