The word ‘settle’ engenders positive feelings – something hinting towards the end of a process or more poetically, a journey; not so when it comes to banking though. In banking terms, a settlement in relation to loans is a scenario where the borrower is not able to repay the loan amount in full, and hence the request for an OST or one-time settlement here the bank agrees for the borrower to pay a lesser amount upfront. The result – you get a ‘settled’ tag on your credit bureau report. So what’s the big deal? One might ask. For that, let us understand this better with the help of a story – your story.
For a moment, let’s imagine you wanted to pursue higher studies in the US and you know it will cost you a lot of money – the likes of which you can only gather via a student loan. Moving on in the story, with your excellent grades and the conviction of a promising future, you also manage to secure the loan amount from a certain bank. While you are studying, you pay your EMIs diligently for a long period of time without a problem. But just as you approach the final few months of your loan repayment, some unexpected expenses crop up and you have no option but to divert your money there.
Hence, you are not able to pay the remaining EMIs on time. You convey this to your lender and upon a lot of introspection and considering your position, they grant you the provision of something called a ‘one-time settlement’ where you can pay a lesser amount as opposed to paying the remaining loan amount with interest. Plus, you get a breathing period to settle your payments. Sounds good up till now? Now comes the twist. 2 years later you freshly apply for a loan again for a property – only this time, your loan application gets rejected. The reason cited – the word ‘settled’ on your credit report.
How does ‘settled’ impact your credit score?
Whenever a lender writes-off a loan, they inform the case to the consumer credit bureau. Even though the loan has been technically closed, it is still not a usual closure. Therefore, credit rating agencies use the word ‘settled’ making other lenders view it as a negative credit behavior. This, in turn, drops your credit score. This information stays on your credit report for a good 7 years or so until it is washed off. This means you have just made it harder for yourself to get a loan in the near future.
How to come clean from this situation?
Talk to your lender and see if you could pay off the outstanding amount that you couldn’t pay back then. If they agree, you can request them for a NOC using which you can raise a dispute with the credit agencies to update your credit report, changing ‘settled’ to ‘closed’. Your updated credit report should be available within the next 30 days. You can then reapply for the loan.
How to avoid this situation in the future?
The very first thing you can do is to practice due diligence and not get into a settlement even though at the time it may seem like the best & easiest way out. Rather, you can choose to liquidate your savings or investments to pay off the outstanding loan amount in full. Try to request the lender to extend your repayment term, reduce the interest rate, or re-evaluate the monthly installment structure so that it becomes easier for you to make monthly payments. As a final resort, you can seek money from your family or friends who won’t possibly trap you into another interest-based loan cycle. To avoid falling into this situation altogether, you can go for a secured loan rather than an unsecured one so the lender will not have to be wary of your repayment capabilities.
Keeping a habit of regular credit check comes handy to keep you conscious about your credit history and mindful of your credit score. If you want to download your credit report or check your credit score, log onto the CRIF website and get it checked for FREE. CRIF is a commercial credit bureau in India and overseas providing credit reports, credit scores, and important banking and financial services.