Can’t pay your loan in full? Here’s how a ‘settled’ status will affect your credit score | Mint

Your credit score is an important factor in determining your loan eligibility and the interest rate for your loan repayment. A healthy credit score improves your loan approval chances at your desired terms. An important factor that can cause an extreme change on your credit score is a “settled” status on your loan. Let us take a closer look at this term “settled” and understand how it may affect your credit score.

Understanding loan settlement

A loan is said to be “settled” when it has been partially paid off, usually as a result of an agreement between the borrower and the lender. In such cases, the borrower may have been unable to repay the full amount. Usually, this is a formal agreement between the borrower and the lender on a specific loan amount with the loan being considered closed, or settled. While this relieves the borrower of any more payments, this has long term consequences that are bound to ensue.

Impact of “settled” status on your credit score

Negative impact on future borrowings: A “settled” status indicates loan default and partial repayment, signalling to lenders that the borrower may not be reliable for future loans.

Drop in credit score: Settled loans can reduce your credit score by 50 to 100 points, making it difficult to secure new loans or credit cards on favourable terms.

Long term credit impact: Settled loans can keep reflecting on your credit report for up to seven years, which will impact your ability to obtain future credit.

Risk of rejection: A “settled” loan puts you at risk of being rejected for a loan, which leads to less access to credit at competitive rates or limits desired.

One time settlement: After OTS you won’t be paying the loan in full which will change the status of the loan from “closed” to “settled” which will have a negative effect on your credit score.

Tips to manage loan settlement effectively

Communicate with your lender: If you’re facing financial difficulties, communicate early with your lender. In some cases, lenders may offer restructuring options or reduced settlements that might have less of an impact on your credit score.

Negotiate a partial settlement: If you can not settle the loan in full, negotiate a partial settlement, in which you repay a part of the loan over a period of time. In fact, it might be a better option than a loan that has been marked as “settled”.

Build a strong credit score: A “settled” term will impact your credit score in the short term but you can gradually improve your credit score by paying off existing debts, applying for a secured credit card and ensuring your credit utilisation ratio is low.

Monitor your credit report: After settling the loan, you should monitor your credit report and make sure the status is correct. You can raise a dispute if there are discrepancies and they will rectify it immediately.

In conclusion, you must make sure that you borrow an amount which you can easily repay without any additional financial burden. This way you can avoid getting into a situation where you have to settle your loan.

(Note: Raising a loan comes with its own risks. So, due caution is advised)