How an One Time Settlement of loan can affect your credit score?

You might have taken a personal loan, a car loan or a housing loan to meet various needs of life, however unfortunately some event like job loss or illness happens and you are unable to make regular repayments. The loan goes bad, interest and principal accumulates and the bank, after sending you repeated reminders even initiate recovery proceedings against you.  But before that, the bank, as an act of leniency, may decide to offer you a One Time Settlement (OTS) by paying a certain sum. Most borrowers jump at the One Time Settlement (OTS) thinking that this is a golden chance to settle the loan at reduced costs of repayment. Hence they may avail OTS by borrowing from friends and relatives to escape the mounting interest and the staggering bulk of the accumulating loan. But little do they know that the ‘’Settled” Personal loan in bank accounts will affect them in another way reflect adversely on their CIBIL score.

How the One Time Settlement works?

When a borrower defaults on a loan for six months or more and the bank has tried hard to make him pay but unable to do so, it might offer the borrower an One Time Settlement. Often the bank considers a genuine reason, such as job loss, crop loss or loss of any other source of income, a prolonged illness, death of the borrower and so on. Basically the bank takes into account how much has been repaid, what is the outstanding and agree to settle it at the one time payment of a lesser sum. In essence, this is a loss for the bank. But it offers a reprieve to the borrower in the form of relief from recovery agents and legal proceedings and they usually accept the offer in both hands. But they may not know the OTS may go against them on the CIBIL score.

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How the CIBIL score is affected? After the bank receives the OTS amount from the borrower, it marks the loan as “Settled” in its books. But it reports the same to CIBIL. While the transaction between the bank and borrower might have come to a close, CIBIL takes a negative note of it. CIBIL regards settled loans as negative credit behavior, and as a result the borrower’s credit score can take a hit of 75-100 basis points because of this. What’s more this negative score remains on the records for seven years and is accessible to all lenders who run checks on borrower antecedents on the CIBIL database. In effect, this could mean banks will perceive you as a “risky’’ borrower and could refuse you loans for next few years.

How to improve the Credit Score?

Hence the borrowers must realize that settling a Personal loan must be the last recourse and should be opted for if there is no other option of garnering money to pay back the loan. Once they make the OTS payment, they must check the credit score and focus all their efforts in paying back the other loans. They must also be more responsible in their credit behavior over the next 12-24 months if they wish to see any improvement in the credit score. Hence the borrowers must be aware about the long term ill-effects about settling a loan and know that it could stem flow of credit in future to a large extent.