Although paying off a loan completely is always our top priority, there are times when it may be challenging to make the required monthly payments. Due to urgent family, medical, and financial needs, some people might find it challenging to make loan payments on time. In this scenario, the lender consents to let you settle the debt in exchange for a lower lump sum payment. But should you take this option?
Here let us learn if paying off debt has a negative impact on your HDFC CIBIL score and what to do if you’ve already made the decision.
How is loan repayment handled?
A borrower might be required to settle their debt with their lender if they encounter challenging circumstances, such as illness, an accident, a loss of employment, or any other real circumstances. In this case, you must first tell the lender about your predicament and ask for some time before you start making payments. If, after assessing your financial situation, you discover that you won’t be able to pay the full amount, you can ask the lender to “settle down” the debt.
The option of a single settlement may be presented to you by the lender; in this case, you and the lender will choose a compromise. Because they are aware that you won’t be able to repay the full loan amount, banks and lenders offer you a settlement and agree to accept whatever amount you can afford to make up for the current loss. When you check your HDFC CIBIL score, the credit report will contain information on the loan’s status. The settlement never covers the full amount of your outstanding debt.
Will negotiating the loan’s terms with the lender have an effect on my credit score?
Paying off debt has been noted as having a detrimental impact on a borrower’s ability to obtain credit cards with the desired limit and loans with favourable interest rates. As a result, their CIBIL score, whose CIBIL full form stands for Credit Information Bureau (India) Limited score, will suffer. The majority of borrowers are unaware of how a loan settlement may affect their credit score. You ought to be aware that repaying your debt might later have a detrimental effect on your CIBIL score. Your HDFC CIBIL score may suffer if you have a “settled debt,” but this happens frequently.
For up to 7 years, the status of a settled debt may still be visible on the CIBIL credit report. The new lender will take your loan settlement status into account when deciding whether to approve your application for a new loan, credit card, or other financial product within these seven years. Because it implies that you were unable to repay the debt, a potential new lender might approve your current loan application with a higher interest rate.
How can I get the loan settlement status off of my CIBIL credit report?
Settlements of loans are not a good place to start. If there is a genuine issue, you should contact your lender. They might agree to give you a reprieve if you make the payments. Any new type of credit may be difficult to obtain if your CIBIL score, whose CIBIL full form stands for Credit Information Bureau (India) Limited, is low. If you’d like the loan settlement status to be removed from your CIBIL credit report, get in touch with your lender and pay the outstanding balance. As a result of the lender reporting your repayment of the debt’s outstanding balance to the credit bureaus, your CIBIL credit score will increase.
Before considering pursuing a “debt settlement” option, talk with the lender about your concerns as this is entirely up to them.
What Can You Do After Settlement to Improve Your CIBIL Score?
With a lender’s assistance, it may be simpler to stop making payments on a debt, but the settlement will have a long-lasting negative effect on your credit score. You must take the required actions to raise your credit score because a high HDFC CIBIL score determines your eligibility for credit cards and loans. Let’s look at how to quickly improve your CIBIL score following a loan settlement. CIBIL full form stands for Credit Information Bureau (India) Limited.
- Establish a good credit history. To determine whether you are qualified for a loan or not, a lender will first look at your credit report. Therefore, you must make sure that your credit history is positive. From now on, make sure to pay all credit card and EMI bills on time. When you run the CIBIL score check again after making on-time payments on your monthly installments, you’ll see your score has improved.
- Constantly make your payments on time. Due to the fact that it accounts for almost one-third of your credit score, your payment history is a crucial factor. Making all of your loan and credit card payments on time and in full as soon as possible is one of the best ways to start the credit repair process. This will immediately have a significant negative effect on your score. You may need to cut back on your spending or alter your lifestyle in order to make full payments, but in the long run, your credit score will gain significantly.
- Pay off any outstanding debts: Unpaid credit card or loan balances have a big impact on your credit score. The best course of action would be to negotiate with each of your creditors to come up with a sum that would satisfy all of your debts, even though it might initially seem difficult to find the money to pay them off. If you wait longer, more interest will be charged, increasing the total amount you’ll have to pay to repay your debts. Your credit score is also being negatively impacted by your missed payments. In reality, delaying payments on a credit card balance or an unpaid loan will only cause problems. Your HDFC CIBIL score increases when you pay off your loan.
Therefore, our recommendation is to reject the bank’s or your lender’s initial offer of the One Time Settlement option if you are having trouble paying back your loan due to circumstances like unemployment, an accident, or a serious medical condition. Keep in mind that the settlement will affect your credit rating. Instead, you could try to sell some of your belongings or a portion of your portfolio to pay back the loan. If you are unable to do that, kindly get in touch with your loved ones. Any agreement ought to be rejected.