How to close a settled loan? If you don't understand this, you won't be able to take out a new loan for 7 years!

It's a big mistake to mistake a loan settlement for a loan closure. If you've settled a loan, be aware that incorrect processing can impact your CIBIL report for up to 7 years, making it difficult to obtain a new loan. Here's the right way to improve your CIBIL score by closing a settlement loan.

If you've taken out a loan, you have to repay it by paying EMIs every month. Loan EMIs last for several years. However, sometimes people are unable to pay EMIs due to job loss, medical emergencies, or financial difficulties. The bank considers anyone who misses three consecutive EMIs a defaulter. The bank categorises the loan as an NPA (Non-Performing Asset).

In the meantime, the bank makes several attempts to recover the money. But when the bank believes the borrower is completely incapable of repaying the loan, in some cases, the bank offers a One-Time Settlement (OTS). Some borrowers prefer this option because it provides a middle ground. But is it the right decision? Does your loan get completely closed after settlement? Learn more about it here.

First, understand what a loan settlement is.

Loan settlement is an agreement between the borrower and the bank, in which both agree to pay a lump sum amount less than the total outstanding amount. Typically, under an OTS, the defaulter has to pay the full principal amount, but interest, penalties, and other charges may be partially or fully waived. In some cases, the principal amount may also be slightly reduced.

Does loan settlement mean getting rid of the debt?

No, loan settlement is not considered closure. The advantage of this is that you are freed from the hassles of recovery agencies, and the borrower can clear the dues by adhering to the terms agreed upon between them and the bank. But never mistake a loan settlement for loan closure. Loan closure occurs when the borrower pays all EMIs.

What is the difference between a loan settlement and a loan closure?

A loan settlement is simply an agreement between the bank and the borrower. However, a loan closure occurs when the entire loan and interest have been repaid.

Disadvantages of Loan Settlement

Upon settlement of a loan, the following entry appears in your credit report: "Settled." This impacts your CIBIL and may cause problems in obtaining loans for several years in the future. Know its disadvantages:

CIBIL score drops by 50-100 points or more

This mark (Settled) remains on the report for up to 7 years

It is extremely difficult to get approval for a new loan, credit card, or EMI.

Many banks blacklist such customers.

Therefore, unless there is an extreme need, you should not choose the settlement option.

How to Close a Loan After Settlement?

If you were forced to settle, you can later change the account to "Closed" by following these steps:

Step 1: Once you are financially stable, contact the bank and inform them that you now wish to pay the remaining interest, penalties, and other charges.

Step 2: Repay the outstanding amount in full. This means that the amount waived in the settlement will now have to be repaid.

Step 3: After repaying the amount, obtain a No-Dues Certificate from the bank. This document is very important as it proves that your loan has been completely closed.

Step 4: After this process, the bank will send an update to CIBIL and other bureaus. Your report will be updated in a short time, and "Closed" will be written instead of "Settled." After this, your CIBIL score will automatically improve.

Q1. Can you get a loan again after a loan settlement?

Yes, but only if you convert the "Settled" account to "Closed." Otherwise, your chances of getting a loan for the next 7 years are slim.

Q2. Does a loan settlement affect your CIBIL score?

Yes, a settlement can cause a score drop of 50-100+ points.

Q3. What documents are required for loan closure?

A No Dues Certificate, Payment Receipt, and Closure Confirmation Letter are required.

Q4. Do you have to pay the full interest after settlement?

It is not necessary, the bank may waive some interest and penalty in the settlement.