Loan Settlement Can Ruin Your Credit Score

When applying for a loan, after a certain period, you will expect to repay the amount taken. But what if you are in such a position that you are no longer employed and are unable to fulfill your repayment commitment? If there is a chance that they might give you a One-Time Settlement (OTS) option, you may think about contacting your lender. Here, you’d most likely want to catch this chance and take up this bid, but it might take a toll on your credit score, little did you know.


Loan / Debt settlement is also known as debt arbitration, negotiation of a debt, or settlement of credit. It is a debt restructuring strategy in which the debtor and the borrower settle to a reduced amount that would be accepted as complete payment. All payments by the debtor are made to the debt settlement firm during this negotiating phase, which usually withholds payments to the creditors even though the debtor has paid a lump sum or has made payments. The debt settlement firm has the leverage to compel the debtor to accept a reduced lump sum payment as a settlement once all the debtor’s accounts are in default due to non-payment. Because of the default, the borrower’s credit score drops dramatically.


A bank is likely to grant an OTS (One Time Settlement) if a borrower has been overdue for a period of six months or more, if they are persuaded by the reason provided by you for non-payment, such as your work loss or other severe medical condition. A certain amount would be written off by the lender so that it is easier for the borrower to repay the loan in one go. Your loan’s status will be listed as ‘settled’ because of this negotiation agreement. And if the borrower had paid the balance outstanding in full, the loan’s status would be reported as ‘closed’ in that case.


They immediately report this case to the CIBIL and other credit bureaus if a lender chooses to settle your loan. Since the loan agreement ends in the form of settlement between the borrower and the lender, it is still not considered by CIBIL as ‘Closed’ but they call it ‘Settled.’ When a loan is called settled, it is seen as a bad credit behavior, and the credit score of the borrower drops by around 75-100 points. If a borrower requests some new credit during this time, it may be difficult for lenders to accept such applications.


Most creditors, however, are not mindful of the implications of such a settlement. Do not get swayed by this choice offered by the lenders until and until you do not have another option. To pay off the unpaid debt balance in full, opt to liquidate your savings or assets if necessary. Generally,’ arbitration’ is recommended to be viewed as a last resort.

In addition, you can ask your lender to extend the repayment period, re-evaluate the monthly payment schedule to make monthly payments simpler for you, decrease the interest rate, or at least waive the interest for as long as possible.

Be sure to review the changes that could occur on your credit report and score until your lender agrees with you. Maintain and try to make up for a decent credit score and conduct when you find a dip in that. You should opt for a secured loan instead of opting for an unsecured one to further escape certain conditions so that the lender would not have to be concerned about your repayment capability.


  • Always try to stay within your means and borrow so much that you can pay on time easily.
  • Remember that when you select this option to close your loan, your credit score will drop dramatically. This would make it harder for you to apply in the future for all sorts of credit items.

When you are unable to repay your unpaid debts on time, debt/loan settlement can look like a promising choice for you. But you should still note that it affects your credit score negatively. So, when you are left with no other choice, try to go for this option.