People generally think that loan settlement is ‘loan closure’. If you think that too, then you are mistaken. Loan settlement and loan closure are two different terms. If you repay the complete loan amount as scheduled, the lender will close your loan account and it will put a positive impact on your credit score.
What Loan Settlement is?
Let’s understand loan settlement with a scenario. Suppose, you have taken a loan from a lender and you are genuinely unable to repay due to some serious issues such as injury, job loss, illness, and some other reasons. In such scenarios, you make the lender aware of your situation and request him to give time to repay before you begin. In that case, your lender will come with a one-time settlement solution. Since you are given some time and your lender settles the loan in one go later, then the status of your loan will be marked as settled also in your credit report.
How Does Loan Settlement Impact Your Credit Score?
If you have taken a business loan and are not in a situation to repay it on time, then you may think of a loan settlement. But, do you know that loan settlement can impact your credit score? Before you go with this option, you should know how loan settlement can impact your borrowing record.
Generally, people think a loan settlement as an opportunity to pay less and get their loan account closed as quickly as possible. If you think the same, then have you ever tried to know the inner calculation? After all, your one wrong step can ruin your financial life. Since it is not a usual closure, loan settlements will be informed to CIBIL and other rating agencies. Your loan closure when mentioned settled, will be considered as a negative credit behavior by other lenders.
This way it could affect your credit score. When your credit score drops, the lenders will be doubtful about your repayment capacity as a borrower. The possibilities are there that lender may refuse your loan request during this time.
Defaulting on Business Loan Repayment
When it comes to business loan repayment, your credit behavior is everything. You should be aware of the drawbacks of missing repayments. Let’s have a look at the consequences of defaulting on business loans:
Drop in Credit Score
Every time you miss a payment, it will be recorded in your credit report. This practice leads to a drop in your borrowing record and reduces your chances of loan approval in the future.
Increased Rate of Interest
If your credit score drops, the lenders will start charging high interest rates to cover the borrowed amount as quickly as possible. You will also be charged a late fee and this will affect your current loan repayment.
Difficulty in Getting Loan Approval in Future
Once your credit score drops, you will find it difficult to get your loan approved in the future. Making late repayments or defaulting on business loan repayment can reduce your credit score and affect your chances of loan approval in the future.
Legal Action or Foreclosure
The outcome of making late repayments depends on whether you have applied for a secured or unsecured loan. In the case of secured loans, the lender will get the authority to sell your asset in the auction to recover the loss. On the contrary, the lender will charge a late fee in case of unsecured loans and the lender can also file a lawsuit against your business.
Defaulting on business loan repayment could be horrible and can drag you into major trouble. This is why you should avoid defaulting on business loan repayment. Avoid being a defaulter on business loan repayment and save your financial future.
What Is the Solution Then?
When defaulting on business loan repayment is not an option, loan settlement seems a perfect solution. You can easily make your way out of the trouble with the loan settlement option. This will affect your credit score in a current situation but save you from the above listed drawbacks of defaulting on business loan repayment. You can reach out to your lender and request for loan settlement. Make sure you tell a genuine reason and ensure that you will return the principal amount.
The lender will give you a loan settlement quote and you have to stick to it. When the lender settles the amount and closes your loan account on the agreed terms. But, keep in mind that it will drop your credit score and ask yourself are you ready for this?
Still, looking for a different solution?
Reschedule Repayment If Your Financial Situation Allows
Of course, there is a way if there is will. You still deserve a chance and look further to request rescheduling of your repayment with reduced interest rates. The lender understands your situation and saves you from defaulting on loan repayments. You can take this middle way to overcome the situation. This means loan settlement is not the only option you have. Loan settlement should be your last resort in such situations. Therefore, consider your condition and reach out to professionals to get reliable solutions.
