16-Jun-2018 written by : FSI-Team
When applying for the loan, you must have taken into considerations the loan amount, the monthly outflow in regards to the equated installments, the term of repayment etc. You would have prepared yourself for repaying the amount regularly but due to unforeseen circumstances, if you have not been able to repay the monthly obligations the lending institution would have followed to have you pay up. And as the time passes, the rigor on these follow ups would have only increased. More often than not, the people who face such challenges end up opting for one time settlement.
Be aware that the term settlement itself is derogatory in financial world. This is only going to lead to continued low CIBIL score and would persist to impact your chances to have access to loans and other credit lines.
Settlement can be defined as a compromise. And we all know that a compromise is not a good situation. A settlement is where the borrower is unable to pay up complete amount due to the bank and both the lending bank and the borrower agrees on a reduced amount that the borrower may be in a position to pay up. With a settlement, the bank foregoes some amount of dues and even the principal amount in some cases. Which necessary means that the bank has run a loss on the loan. So if a loan account gets updated with settled flag, it is treated to be negative.
Each account on the bureau report has a status. It could be closed (in case the account has been fully paid), active/current (in case the account is still being paid and does not have a default), or will have a default flag depending upon the status (settled/ write off/ post write off settled etc). In case of a settled account, the same would get updated on the bureau report. It is suggested that free credit report is obtained by you to check the status on all your accounts. This will give you some clarity on this front.
As mentioned above, the settlement will impair the credit profile. It will result in making the credit score nose dive. Further it will also impact your credibility and ability to secure other loans. Over a period when the current active loans will get over, the credit profile would take further beating. This will have negative impact even further.
As you are aware, any score below 750 is deemed to be not a good score. Due to settlement and no active account, the score will continue to plummet.
One point to be remembered is that the total amount due including the interest and or charges is what you are liable to pay. Getting to settle the account while will put off the collection calls but will you’re your interests in the long run. The right course of action will be to have a clear discussion with the bank. Appraise them on the current situation proactively and seek time. May be a restructuring of the loan and bringing down the EMI amount payable every month will help in paying up the complete amount.
In case you have already settled an account in past, it is highly advisable that you contact the bank and ask them for the amount that you would have to pay to convert the status into a closed account. The bank might be willing to give some discount on the charges or interest, but you should not push for it hard. The objective has to be to close the account completely and closed status getting replaced with settled status.
Please do not settle the account is what is advised.