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.
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.