A ‘settled’ loan status on your credit report can actually unsettle your aim of borrowing funds. ‘Settled’ is not a positive thing in the world of raising money. If you have a ‘settled’ loan recorded in your credit report, then you have to change it as it will have an adverse effect on your ability to borrow.
A ‘settled’ loan is different from a ‘closed’ loan and is actually an arrangement with the lender wherein you pay a certain mutually agreed amount because of your inability to pay in full due to an emergency. You can change your ‘settled’ loan status to a normal one by following certain clearly laid down steps established by lenders and credit bureaus. Here is a guide on what ‘settled’ loan status in a credit report means, its impact on credit score and steps to change it.
What does a ‘settled’ loan status in your credit report mean?
A ‘settled’ loan status in your credit report means that a loan or credit account was closed after you paid an amount that is less than the full outstanding dues. Such a status can adversely impact your creditworthiness. There are several instances of borrowers finding it difficult to repay the loan after agreeing to pay it in EMIs (equated monthly instalments) due to genuine reasons. This may be due to job loss, sudden medical conditions and other emergency situations.
If you fail to repay the EMI for an extended period of time, the lender would offer you a ‘one-time settlement’. After conducting extensive discussions with you and after assessing the situation, bank officials will decide the amount that needs to be settled. After you pay the mutually agreed amount, the bank will update the status of the loan account as ‘settled’ in your credit report and share the same with the credit bureau.
There is a common misperception that a ‘loan settlement’ is ‘loan closure’. A loan closure involves payment of EMIs until the last instalment as per schedule. After all the EMIs are paid, the loan account is closed.
“Most customers mistake the term ‘loan settlement’ for ‘loan closure’. Nevertheless, both these terms are not the same. A loan closure is paying off the monthly instalments until the last payment as per the schedule; thus, closing the loan account,” ICICI Home Finance said in its explainer on ‘settled’ loans.
What is the impact of a ‘settled’ loan on credit score?
The lender, who settles the loan with the borrower, informs about this to credit bureaus such as CIBIL. The loan settlement has a negative impact on the credit score as the closure of the loan or credit account is not a normal one. The term ‘settled’ reflects poorly on the borrower’s credit behaviour and as a result her/his credit score drops once the same is updated in the credit report.
“A loan settlement, unlike the loan closure, has the status marked as ‘settled’, which has an adverse CIBIL impact on your credit score, which is dropped by 75-100 points,” ICICI Home Finance said.
The ‘settled’ loan status typically will be in the credit report for up to seven years. If the borrower applies for a loan during this timeframe, the chances of availing it are quite slim as the lender would doubt the repaying capacity. “Your past credit behaviour has a long-lasting impact. Lenders view ‘settled’ as risky, primarily because if you haven’t met your repayment obligation before, there are chances that you might do this again,” CIBIL said in an explainer on ‘settled’ loans.
What are the solutions available to borrowers?
Most borrowers do not know the impact of a loan settlement on their credit score. They will find it difficult to raise loans of any kind for at least seven years. If the lender proposes a settlement for your existing loan, you can request for a revision in repayment terms. This includes extension of the loan tenure, reduction in interest rates or a complete waiver of interest to enable you to pay the EMIs on time comfortably.
If you have already made a settlement and as a result your credit score is affected, you can still change it by paying the outstanding or written-off amount in your loan account. After this, you have to get a ‘No Objection Certificate (NOC)’ from the lender and inform the credit bureau about this. This will enable you to change the status of your loan account from ‘settled’ to ‘closed’.
What are the steps involved in removing a ‘settled’ loan account from your credit report?
There are instances when the credit report might show ‘settled’ even when you have never done so. In such cases, you can request the credit bureau to remove the ‘settled’ status by raising a dispute. But if your loan account is actually a ‘settled’ one, then here is a step-by-step guide to change the status.
- Go to the official website of the credit bureau and log in to your account with your credentials. If you do not have an account, you can create one to request a change in loan account status or raise a dispute.
- Select the account with ‘settled’ status and attach the supporting documents that show the updated details of the loan account with information that you have closed the loan account with the lender.
- Provide accurate details regarding the actual loan status and submit the request.
- The credit bureau will then verify your claim, which may take up to 30-45 days. They will then change the status.
Though removing ‘settled’ loan status will not improve your credit score immediately, it will have a positive impact over time and will be quite helpful in availing fresh credit. Do always remember that removing a ‘settled’ loan from your credit report is a must for improving your creditworthiness.
Allirajan M is a journalist with over two decades of experience. He has worked with several leading media organisations in the country and has been writing on mutual funds for nearly 16 years.
