In our earlier
days, when we were not well-versed with bank accounts and personal finance, we
might have made financial decisions that included taking loans without proper
management. As a result, situations may arise where we have outstanding loan
amounts, such as small personal loans, and the banks may approach us for a
settlement. It's crucial to understand a few key points before deciding to
settle a loan account. This article aims to provide valuable insights into the
implications of settling a loan and the considerations to keep in mind.
Loan settlement and loan closure are not
the same:
It's important
to differentiate between closing a loan and settling a loan. While closing a
loan implies fulfilling all payment obligations and officially closing the
account, settling a loan involves reaching an agreement with the bank to pay a
reduced amount, thereby relieving you of further payment obligations. However,
the closure letter from the bank will clearly state that the loan has been
settled and not closed. Settlement often requires the bank to sacrifice a
portion of the principal amount and the interest they would have earned.
One crucial
aspect to consider is the impact on your credit score. When a loan is settled,
it leaves a mark on your credit report, indicating that you have not fully
repaid the borrowed amount as agreed initially. This settled status on your
credit report can negatively affect your financial credibility. Lenders,
including banks and financial institutions, consider credit scores to assess an
individual's creditworthiness. Therefore, a settled loan status will not
improve your credit score nor boost your credibility in a day.
Difficulty in Obtaining Credit:
Settling a loan
may seem like a smart move given your financial situation at the time. However,
it's essential to recognize that the ghost of the settlement can haunt you when
your financial status improves and you plan to apply for further loans, such as
for a house, car, or business expansion. Lenders are cautious when considering
loan applications from individuals with a history of settled accounts. They may
perceive such individuals as higher risk borrowers, which could lead to
stricter terms, lower credit limits, or even loan rejections.
Conclusion:
Settling a loan
account can provide temporary relief from immediate financial burdens. However,
it's important to be aware of the long-term consequences associated with such a
decision. While closing a loan signifies fulfilling all payment obligations,
settling a loan involves compromising with the bank and leaving a mark on your
credit report. This settled status can have a lasting impact on your financial
credibility and make obtaining future credit more challenging. Therefore, it is
advisable to carefully consider the implications and explore alternative
options, such as negotiating a repayment plan or seeking financial counselling,
before opting for a loan settlement.
Note: The information provided in this
article is general in nature and should not be considered as financial advice.
It's always recommended to consult with a financial professional for
personalized guidance regarding your specific financial circumstances.
