Life is unpredictable and sometimes everything does not turn around the way it was planned. You take a loan, plan for it for months, explore the options, choose the suitable tenure and amount that you can repay, but with the changed situation, you find it difficult to meet your repayment commitment. Not being able to pay your loan is something which leads you to One-time settlement.
What is a loan settlement?
If you have defaulted on a loan amount and unable to pay up and interest accrued becomes more than principal, in banking parlance you get a call from the lender for One Time Settlement(OTS). In the offer the lender usually demands for a payment of a part of the amount due, usually more than the principal amount. This option will be offered to you only after you have gone three straight months without paying your EMIs. Moreover there has to be a good reason for you to default on your payments.
Banks generally offer the option of one-time settlement to those who face financial difficulties for various reasons such as loss of income and employment, health problems, or loss In business. Although, on time settling a loan may sound beneficial, they can significantly impact your credit score.
How does it work?
If you opt for a personal loan settlement, you will have to pay a part of the overdue considering the fact that you are unable to clear the whole payment. Loan settlements are also done in case there are disputes between lenders and borrowers.
The settlement amount is negotiable with the lender, but more often than not, it is either equal to or exceeds the principal amount. Once you agree on the amount with your lender and pay it off, your lender will write off the difference and report a loss on the loan in its books. Once the loan amount is settled, the bank will stop sending recovery agents to you.
Following a one-time settlement, the relationship between the borrower and lender gets terminated immediately. However the banks write off the waived amount and losses and also tend to keep the record of such borrowers in their blacklist.
Effects of one time settlement of personal loan
Impact on Credit Score
The worst impact of settling the loan you can see on your credit score. When a bank or lender writes off the debt of the borrower, it will be reported to the CIBIL agency and the agency will see it as a negative point. CIBIL will not consider it as closed, instead they will term it as ‘settled’, which means the loan has been repaid in parts. This is enough to spoil your credit report. Though the relationship between the lender and the borrower has terminated, CIBIL doesn’t take that into consideration. The borrowers credit score will drop by 75-100 points and will hold this record for 7 years.
So if the borrower tries to take a loan from any lender during that period, it’s highly likely that the lenders will be vary of the borrower and try to stay away from giving any loan. The bank always looks into the credit report of the borrower before offering him any loan. This is because your credit report says that you have failed in the past to fully repay your loan.
Impact on the lenders and the borrower’s relationship
Once you settle a loan with a particular lender whatever may be the reason behind it, the relationship you had with your lender has been sabotaged. If in future you will approach your lender for any loan, he will reject your loan application as you have been marked as a blacklisted customers in their records for settling the loan.
Hinders future opportunities of getting another loan
After settlement, if you try to approach any lender for a personal loan, your application is likely to get rejected. No lender will allow you to take the loan due to the credit score. When you are in a sticky situation, you take a one time settlement offer, but are unaware of the effect it has on your credit score. You do not realise that it does more damage to your credit than you can imagine. It could result in you finding it hard to get another loan for the next 7 years as CIBIL will hold the record for that period.
This is why one time settlement may sound like a relief for those who are unable to pay loans, but the cost they are paying for their unwillingness is way more than anything. Your credit score helps the lender decide that you are qualified enough for the loan. As per CIBIL, your credit score ranges between 300-900 and those who have maintained a score of 750 are most preferred by the lenders.
Loans and credit score share a positive correlation: the higher the credit score, the higher the chances you have to avail a loan and negotiate the interest rate on the loan. A good credit score also enhances your loan amount eligibility.
Another way out
If you are facing any difficulty in repaying you personal loan EMIs on time due to reasons like loss of income or job, accident , severe medical condition, etc. It is highly advised to not blindly jump on the option of one time settlement option offered by your lender. Always remember that this is not your first and only option.
A one time settlement option may come in handy as a last resort, but there are plenty of things you can do to repay your loan in full. Here are some of the options you can consider :
Ask your lender to extend some time – Lenders understand that you do not want any flag of settlement on your credit report, and may be willing to offer you some more time to repay the loan in full rather than make a one time settlement.
Liquidate your assets – You can also think of liquidating a part of your portfolio or some asset and clear off the loan for good.
Ask your lender to restructure the loan – You can also ask your lender to restructure the terms and condition of the loan to make it easier for you to pay it completely.
Interest free loans from your relatives – You can also ask your relative to lend you some money at zero interest rate for the repayment of the loan. This is one of the simplest and easiest ways.
Increase your sources of income – If none of the options works for you can also think of increasing your sources of income. There are plenty of options available in the market to make money both online and offline on a freelance basis.
Always have a contingency plan – Personal loan is for sure a collateral free, unsecure type loan. But to avoid such situations always have a contingency plan while taking a loan. Even if the bank doesn’t require any collateral, always have a back up plan for critical situations. You can even take insurance on your loan amount and the insurance company will carry all your formalities of paying your dues till you are capable to do so.
Remember that your credit score is directly dependent on your repayment history : delay or default in paying dues will impact your credit score negatively.
If you can’t find the right means to repay your loan and have to choose the settlement option, you can still covert the ‘settled’ account into a ‘closed’ account later. Once you are financially capable, get in touch with your lender and request to pay your dues, interest and penalties. Once you clear you’re your dues in full, ask your bank to give a no-dues certificate(NOC). Your lender then will report your account as a closed account to CIBIL and it will be reflected in your credit score. You can then take the safety measures to improve your credit score to gain easier accessibility to credit in future.
In conclusion, One-time settlement may seem the easiest and feasible option at the time but it does have the long-term implications. The best approach is to think it through before applying, compare the products, check the tenure period, interest rates, assess the affordability of its EMIs, and implement smart strategies to repay the loan.