What is a loan settlement

Loan settlement is a process where a borrower negotiates with the lender to pay a portion of the outstanding loan amount as a full and final settlement. This typically occurs when the borrower is unable to repay the full loan due to financial difficulties. Once accepted, the lender writes off the remaining balance, and the account is marked as ‘settled’ in the credit report. While it may offer immediate relief, a loan settlement can negatively impact the borrower’s credit score and future loan eligibility. It is generally considered a last resort when all other repayment options have been exhausted.

To initiate a loan settlement, the customer must get in touch with a representative from Bajaj Finance Limited. The borrower is required to submit relevant documents for the lender’s evaluation. Based on this assessment, the lender will take a discretionary decision regarding the settlement request. If the request is considered, a formal settlement letter will be issued to the customer.

The terms and conditions mentioned on the loan settlement agreement must be followed by the borrower. If there’s non-adherence, borrowers are liable to adhere to the original loan sanction terms and conditions.

What is Loan Settlement Process?

The loan settlement process involves the borrower negotiating with the lender to repay a reduced amount as full and final settlement of the outstanding loan. This typically occurs when the borrower is unable to repay the full amount due to financial hardship. The process begins with the borrower approaching the lender and proposing a lump-sum payment that is lower than the total outstanding. If the lender finds the offer reasonable, they may accept it as a practical solution to recover part of the dues. Once the agreed amount is paid, the lender usually marks the account as ‘settled’ with credit bureaus. While this provides some relief to the borrower, it can adversely affect their credit score.

How does loan settlement impact your credit score?

Loan settlement occurs when a borrower is unable to repay the entire loan and negotiates with the lender to pay a lesser amount as a full and final settlement. While this may offer temporary relief, it significantly affects the borrower’s creditworthiness. Here’s how:

• Negative reporting to credit bureaus: When a loan is settled, lenders report it as "settled" instead of "closed" in your credit report. This status signals that the borrower failed to repay the full amount, leading to a drop in credit score.
• Impact on credit score: A loan settlement can reduce your credit score by 75 to 100 points or more, depending on your credit history and the severity of the default. This drop can take several months or years to recover from.
• Reduced loan eligibility: Future lenders may view you as a high-risk borrower. This reduces your chances of getting new loans or credit cards, especially unsecured ones, as settlement indicates financial stress or inability to repay.
• Higher interest rates: Even if you manage to get a loan after a settlement, it may come at a higher interest rate due to your poor credit history.
• Long-term impact: The “settled” status remains on your credit report for up to 7 years. During this period, any lender reviewing your report may hesitate to approve your credit applications.
• Difficulty in availing premium financial products: Settled accounts may also affect your eligibility for premium credit cards, home loans, or higher-value personal loans.
• Challenges in increasing credit limits: Credit card issuers or lenders may be unwilling to raise your credit limit if your report shows past loan settlements.
• Loss of negotiating power: In future loan negotiations, a history of settlement weakens your position. Lenders may demand more collateral or stricter terms.
• Limited access to joint credit options: If applying for a joint loan, your co-applicant may be affected due to your settlement history, reducing the joint application’s approval chances.

How can borrowers deal with this?

Dealing with the impact of a loan settlement on your credit score requires strategic action and financial discipline. Here are several steps borrowers can take to manage and recover from the consequences:

Begin by understanding your credit report. Obtain your report from major credit bureaus and check if the settlement is correctly marked. If there’s an error or misreporting, raise a dispute and get it corrected to avoid further damage.

Next, adopt responsible credit behaviour. Start paying all your existing EMIs and credit card dues on time. Consistent timely repayments over time help demonstrate improved creditworthiness and gradually improve your score.

Avoid applying for new credit immediately after settlement. Too many loan or credit card applications in a short period may further harm your score and portray you as credit-hungry.

To rebuild credit, consider taking a secured credit card against a fixed deposit. These cards are easier to get with a poor score and, when used responsibly, help build a positive payment history.

If financially possible, negotiate with the lender to convert the “settled” status into “closed” by repaying the remaining dues. Some lenders may be willing to revise the status after complete repayment, which helps improve your credit report.

You can also take professional credit counselling. Financial experts or credit repair agencies can offer guidance tailored to your situation and help you chart a structured repayment or recovery plan.

Maintain a low credit utilisation ratio. Keeping your outstanding credit card balances low compared to the available limit shows prudent financial behaviour and boosts your score.

Lastly, be patient and consistent. Credit recovery is a gradual process. With disciplined financial habits and a steady income, your credit score can improve over time, restoring access to loans and better financial products.

Benefits of Loan Settlement

Loan settlement offers support to borrowers in financial distress by enabling them to negotiate a reduced repayment amount, usually paid as a lump sum. This arrangement can offer immediate relief, halting the accrual of interest and penalties while helping avoid legal complications and the stress of ongoing recovery efforts. For lenders, it allows partial recovery of dues that might otherwise be unrecoverable in the event of default. Although loan settlement can negatively affect a borrower’s credit score, it is often less harmful than ongoing defaults or bankruptcy, and it provides an opportunity for the borrower to gradually rebuild their credit profile.