Loan settlement and your Credit Score

Loan settlement is a word that ‘loan closure’ is frequently mistaken for. They are not, however, the same. The lender can close the loan account if you pay off all your monthly installments on time and full repayments as scheduled; this is known as ‘loan closure’.The same details will be submitted to credit rating agencies and if you have successfully paid the loan off, it will have a favorable effect on your performance.


The meaning of loan settlement is clarified by a situation in which a lender has taken out a loan. Today, because of a disease, accident, work loss, or any other reason, you are completely unable to make repayments. In this scenario, before you begin repayments, you tell the lender of your condition and ask them to give them some time off.

You can get a one-time settlement offer from the lender where you take some time off and then settle the loan in one go. You will readily accept this offer because you are given some time and waiver on interest and penalties. The status of this loan will be reported in the credit report as ‘settled’ when the loan is settled in one go later.


If the lender agrees that your reason for non-payment is legitimate, he will consider offering you a one-time settlement. This option will only be given if you plan to pay the loan in one installment. A certain amount would be written off by the lender so that it is easier for the borrower to settle the debt. The sum that would be written-off depends on the scenario’s magnitude and the borrower’s repayment capacity.

The status of the loan would be labeled ‘settled’ because of this arrangement for an amount lower than the total unpaid amount. In comparison, the status of the loan would be reported as ‘closed’ if the borrower had fully paid the unpaid balance.


Whenever a lender intends to write-off a loan, it tells CIBIL and other credit scores ( Credit Bureaus) agencies of the case immediately. While in the form of settlement, the loan agreement comes to an end, it is still not the normal closure. Credit rating agencies thus refer to the deal as ‘settled,’ making it perceived as a derogatory credit activity by other lenders. The credit score of the creditor declines, in exchange.


The loan write-off is seen by creditors as an incentive to pay less for the loan account to be closed. However, the internal estimates and effects of such a settlement are not known to most borrowers. This account will keep showing as settled till the time it is not closed by paying the waived amount and in some cases waived amount plus penal interest,

Do not get swayed by the one-time loan settlement option offered by lenders until you have a bothering option. To pay off the unpaid debt balance in full, opt to liquidate your savings or assets if necessary. Think about any other potential techniques to collect enough money to close the loan account.’ Settlement’ is suggested to be regarded as the last resort.

In addition, you can attempt to request the lender to extend the repayment period, re-evaluate the arrangement of the monthly installment so that you can make monthly payments simpler, reduce the interest rate, or at least waive interest for as long as possible.

Be sure to review the changes that occur on your credit report and credit score after you enter an agreement with the lender. Keep your credit score and actions nice, and try to compensate for any decrease in your score.

You should go for a secured loan rather than an unsecured one to further discourage certain conditions, so the lender would not have to be mindful of your repayment capability.


  • Borrow within your capacity for repayment and as per your requirement. Don’t get greedy and borrow more, as you’re going to find it hard to repay.
  • The main explanation that a one-time settlement option is given is that the lender would be confident that you are unable to repay the loan; for anything you would pay, they will like to close the deal. So, with everything they can get from you, they would like to finish the contract.
  • Your credit score would drop dramatically with “settled” status. In the future, this would make it harder for you to get some loans.