Credit Score: Can loan settlement affect your credit score? Its disadvantages and ways to remove tag

Credit Score: When there is a sudden need for money and there is no way out, taking a loan becomes a compulsion. But due to the facility of credit cards and instant loan, people don't hesitate in taking a loan. However, if the debt burden increases or the financial situation does not support, it is not the right way to take a loan. In such a situation, people start thinking that the bank should settle the loan. But the loan settlement can also spoil your credit score. 

What is loan settlement?

If you have taken a loan and for some reason, and you cannot repay it as per the original terms and conditions, you ask your lender to give you an option.

The lender gives you the option to make a one-time payment to settle your loan account.

This amount should be less than the outstanding payment you have, i.e. the amount of the loan you have to repay.

When you repay such a loan, your loan account will show it as 'Settled Debt'.

Please note, this is not a closed account, it is a settled account.

How will it affect your credit score?

Many people do not know that loan settlement has a negative impact on their credit score.

The loan settlement tag can create difficulties for you in taking further loan.

Even if the lender gives you a loan, it won't give you at competitive interest rates.

Likewise, if you want to get a credit card, you may have to compromise on a credit limit less than your requirement.

The tag of settled debt will remain stuck

The tag of your settled loan can remain in your CIBIL credit report for the next seven years.

In these years, whenever you apply for a loan or a credit card, the lender will take the decision on loan approval only after keeping in mind the status of your loan settlement.

This status would mean that you were not able to repay the previous loan and you may be a risky borrower, that is, the bank may lose money.

Can the tag of Settled Debt be removed from your report?

If you want to remove the loan settlement tag from your credit report, you can repay your outstanding loan to your lender.

Ask your lender to give you a 'No Dues Certificate'.

This will be reported to the credit bureau by the lender and this will also improve your credit score (CIBIL Credit Score).