Does a Settled Loan Affect Your Credit Score?

What is a Settled Loan?

Settled Loan refers to situation where a borrower is unable to repay the whole loan amount and negotiates with the lender to pay settled amount as the final amount. The lender then accepts this partial payment and closes the account as “settled.” While this might feel helpful during financial distress, settled loan can affect your credit score.

For instance, if you have a Home Loan of ₹50 lakhs and undergoing a financial hardship. However, if you can make partial payments of ₹30 lakhs, you can negotiate with the lender to settle the loan at ₹30 lakhs.

Also Read: Home Loan: All You Need To Know

This is not like closing the loan, which means closing the loan after repaying the loan.

Difference Between Closed Loans And Settled Loans

Repayment completion

Under closed loans, borrowers repay full loans as per loan agreement while under settled loans, borrowers pay partial amount, and rest gets waived off due to financial distress.

Credit report status

If a borrower chooses to settle the loan, it will reflect “settled” in your credit report status. On the other hand, if you choose to close the loan, it will reflect “closed” on your credit report.

Impact on credit score

A closed loan will leave positive impact on your credit score, which reflects your financial discipline while settled loan will leave negative impact on your credit score that can lower credit score by several years.

Perception by lenders

Lenders view borrowers with closed loan status as low risk compared to borrowers with settled loan borrowers, who are viewed as high risk.

How Does Settled Loan Impact Your Credit Score?

• Negative credit report remark – Marked as “Settled” by credit bureaus like CIBIL, Experian and Equifax, signalling incomplete repayment.
• Credit Score drop– The exact fall depends on loan type, amount, and repayment history.
• Long-term visibility – The settled status stays on your report for up to seven years, affecting future loan approvals.
• Higher interest rates – Even if approved, lenders may offer loans at costlier rates due to perceived risk.
• Lower approval chances – Banks and NBFCs may reject applications, especially for large loans like a Home Loan or Business Loan.
• Negative perception by lenders – Settlement is viewed as a sign of financial instability.
• Impact on premium products – May limit eligibility for high-limit credit cards or unsecured loans.

Also Read: Why is Credit Score Important for Loans?

Impact of Settled Loans on Home Loan Eligibility

A settled loan on your credit report can significantly influence your Home Loan eligibility. This can lead to stricter scrutiny, lower sanctioned loan amounts and higher interest rates. Your overall credit score and financial health also play a crucial role in determining whether your Home Loan application is approved.

Lender evaluation criteria when reviewing a settled loan:

• Lower credit scores reduce approval chances.
• Past defaults or delayed payments raise red flags.
• High existing debt affects eligibility.
• Stability of current income and employment.

Improving your eligibility after a loan settlement involves rebuilding your credit score, maintaining a low debt ratio and demonstrating consistent financial discipline for at least 12–24 months.

Alternatives to Loan Settlement for Financial Distress

Before opting for loan settlement, consider other options that may protect your credit profile and future borrowing capacity.

Loan restructuring or rescheduling –

Request the lender to modify repayment terms to make EMIs affordable.

EMI moratorium or temporary interest waivers –

Seek short-term relief to manage cash flow during financial strain.

Balance transfer or top-up loans –

Shift your loan to a lender offering lower interest rates or take an additional loan to consolidate debt.

Using savings or investments –

Liquidate non-essential assets to repay loans in full.

Secured loan options –

Use collateral to obtain funds at lower rates to clear high-cost debts.

Professional financial counselling –

Engage a certified adviser to explore structured repayment plans.

How to Rebuild Your Credit Score After Settling a Loan

Rebuilding credit after a settlement requires time and consistent effort.

1. Pay existing debts and credit card bills on time –

This demonstrates repayment discipline.

2. Avoid unnecessary credit enquiries –

Multiple applications within a short period can lower your score.

3. Maintain a low credit utilisation ratio –

Keep usage under 30% of your credit limit.

4. Use secured credit products –

Secured credit cards or loans backed by deposits help establish positive repayment records.

5. Monitor credit reports regularly –

Check for errors and ensure past payments are accurately reflected.

6. Be patient with recovery timelines –

Credit scores typically improve within 12–24 months of consistent positive behaviour.

Apply now for a loan.

FAQs

Q.1. Does a settled loan affect my CIBIL score permanently?

A. No, the impact is not permanent. However, the settled loan status remains on your credit report for up to seven years from the date of settlement.

Q.2. Can I get a Home Loan if I have a settled loan on my credit report?

A. Yes, but it may be more challenging. Lenders may sanction a lower loan amount, charge higher interest rates or require additional security.

Q.3. How long does the settled loan status stay on my credit report?

A. It stays for up to seven years from the date of settlement, as reported by credit bureaus like CIBIL, Experian and Equifax. The negative impact reduces over time, especially if you maintain a strong repayment track record after settlement.

Q.4. Can the 'settled' status be removed from my credit report?

A. It can only be removed if it was reported in error. If accurate, it will remain until it automatically drops off after seven years. Some borrowers negotiate a “closed” status with the lender by repaying the waived portion, which can improve credit perception.

Q.5. Is settling a loan better than defaulting or skipping payments?

A. Yes, because settlement is still a negotiated closure, whereas default damages your credit profile more severely. However, full repayment with “closed” status is always preferable for long-term credit health. Settlement should be the last resort when no other options are viable.

Q.6. How can I avoid loan settlement while facing financial difficulties?

A. Communicate with your lender early to discuss alternatives like restructuring, moratoriums, or balance transfers. Use savings or assets to clear debt if possible and seek professional financial counselling to create a sustainable repayment plan.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com