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Finance

Does Loan Settlement Ruin CIBIL Score?

Taking loans to meet personal needs is a very common practice. From baby boomers to millennials, everyone avails loans for a variety of reasons, ranging from home renovation costs to wedding expenditure requirements. Lending institutions offer loans for all these reasons for the borrower to meet their financial commitments in a short period of time without undue hassle.

When borrowing from a financial institution, among other documents, your CIBIL score is checked. CIBIL, which stands for Credit Information Bureau (India) Limited, is a score that ranges between 300-900 and is used by lenders to determine your credit-worthiness. A score between 700-900 is considered healthy, and reassures lenders of your ability to pay back the loan amount. Scores below 500 are considered low, and usually warrant inspection and often, refusal by the lending institution to give out the loan amount.

In order to check CIBIL score, you can always get access to your customised Financial Health Check Report (FHCR) on Finserv MARKETS. Not only does it provide you with a detailed report regarding your financial health, it also gives you your CIBIL score for free.

In order to maintain a good CIBIL score and a healthy credit profile, it is essential that you maintain a timely repayment schedule and avoid defaulting on your payments However, despite taking all the necessary precautions, there can always be situations wherein you are unable to keep up with the predetermined EMI schedule. This can happen for a variety of reasons, ranging from an unforeseen setback in your personal finances, to medical emergencies or other grave occurrences. They can impact your finances in a way that your ability to pay back the loan becomes near-impossible.

In such circumstances, financial institution look into the situation in order to assess whether the borrower indeed cannot pay back the amount. After 6 months of being unable to pay the loan amount, financial institutions begin investigating reasons for the default. Upon ascertaining the same, they settle upon a one-time amount that will release the borrower from debt. This is a great way for financially burdened individuals to make it out of the debt trap.

However, while you do end up debt-free, there is a definite drawback in loan settlement. Your CIBIL score will take a hit when you settle debt. Despite the legitimacy of your circumstances, your credit-worthiness will be impacted, which in turn will impact your ability to avail loans in the future.

What’s more, this instance of debt settlement will stay in the CIBIL records for the next 7 years. Your score will drop by a whopping 75-100 points. A remark will be added in the CIBIL report, stating that the loan was ‘settled’ instead of it being ‘closed’. This will be considered negatively by lending institutions in the future. When applying for a loan in the future, lenders may reject a loan right away on the basis of this remark and the reduced CIBIL score.

When caught in such a situation, it is important to understand that it may be better to stake through the financial crisis than to lose financial security for the next several years by settling the debt. One way to pay back the lender without settling is to liquidate assets, cash in savings such as gold, sell off unused land, borrow from friends etc. This will certainly be better in the long run, since your CIBIL score won’t be impacted adversely.

However, if you are unable to pay back the loan, and have to settle, all hope is not lost! You can always revive your CIBIL score by taking small loans and repaying them within the stipulated time period and understanding why you need a good CIBIL score is crutial. Additionally, as time goes by, the remark will carry less weight when applying for a loan.

Thus, while settling debt will certainly impact your CIBIL score, it is not impossible to recover. By following the right practices, you can revive your CIBIL score and avail loans for a variety of reasons again!

In order to check CIBIL score, all you have to do is access the Financial Health Check Report on Finserv MARKETS. The Financial Health Check Report will provide you with your CIBIL report, free of cost. You can receive a detailed, personalized summary of your finances, with handy insights to help you make better financial decisions in the future. This way, you will know your credit-worthiness. And with that, you can go right ahead and avail your own loan today!

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