When you take a loan, it might be the case that you decide to repay the loan through the tenure of the loan, but due to certain uncertain situations, you might end up being in a state that you cannot pay the monthly EMIs. This is when you might approach the bank and inform about your situations. Of course, banks will do their level of checks and might offer you with a choice of clearing the debt with one time settlement. Though this would look very attractive and ideal problem at that point of time, it is important to also understand that this difference might leave an impact on your credit scoring and will be a remark for the rest of the financial assistance.
Loan Settlement from Lender’s Perspective
Banks will definitely consider the one time settlement option is they are convinced that borrower has genuine issues to repay the loan amount. Once the borrower fails to make payment for 6 months, banks will start investing all aspect of the financial worthiness of the borrower. Situations such an accident, job loss or even serious medical issues will be taken into consideration before approving a onetime payment. Borrower and the bank representative will sit together to scrutinize the actual issue of non-repayment and based on this discussion the decision will be made.
Banks will also check upto what extent of the loan can be paid by the borrower and accordingly will finalize the amount that should be written-off. This amount will be written into the loss book of the bank and the borrower will be set free. This relief is actually at a very high cost which the borrower will realize next time when he is in need of some financial assistance from banks, NBFCs or other types of lenders.
Impact on CIBIL
Every time a lender or bank writes-off the debt of the borrower, the same will be reported to the CIBIL agency. This will impact the credit score and a remark will be added. Even though the relation between the bank and borrower has come to an end, it will not be taken into consideration by CIBIL. CIBIL will term the loan as settled, instead of ‘closing’. The term settled in the CIBIL report will hold negative impact and the credit score will drop to 50-100 points straight away.
This information will be in the CIBIL report for about 7 years. Any time during this period, if the borrower tries to apply for a new loan, it will be rejected without any second thought. All lenders and banks will check the applicants past payment records before sanctioning loan and no one will be ready to offer loan unless the borrowers gives a really huge amount as collateral for a small loan amount. Banks have every right to reject the loan and this decision is at the discretion of banks. Borrowers or no external parties have any say in this.
Lack of Awareness among Borrowers
One time settlement offer is taken by borrowers who are in real sticky situation. Even banks are very considerate before approving the settlement. Most of the times borrowers will fail to understand the after effects of such type of settlements. The damage caused to the CIBIL score is way more than what one can imagine about. This will hold up the option of getting loan from banks for the next 7 years and more.
Way out for Borrowers
Banks might be ready to offer you one time settlement when you are in a real financial crisis situation like job loss, accident or serious medical conditions. But as a borrower you should think about all the aspects and try to understand the complete impact on your future financial requirements. Don’t jump to take up this offer, just because it is available easily. Your loan might be written off, but your financial security will be lost for a great period of time. Instead check if you have some assets that can be liquidated, like your savings in gold or precious metal, some unused land, borrowing from friends or family and so on.
Even it is possible to take a loan against your Public Provident Fund or Life Insurance policy. The rate of interest on these types of loan will be less thus makes it more affordable than bank loans that have huge EMI backed with high interest rates. Make use of these tips to wisely act while you are in financial crisis. The financial crisis might only be for a year or two in most cases but CIBIL impact will last longer.
