Can I Get a Loan After Settlement?

A financial emergency may occur anytime, and when it happens, it can throw off your monthly budget and financial planning.

In such a situation, you may opt for a one-time settlement and expect the lender to provide relief from the interest and other associated charges. But is loan settlement a wise decision? In this blog, we will explore what loan settlement is, its effect on credit score, how to improve your credit score after loan settlement, and more.

What is loan settlement?

Many people often confuse the terms loan settlement and loan closure and use them interchangeably. However, these are entirely two different financial concepts. A loan settlement is when you choose to close the loan account by paying a lower amount than the actual amount you -owe. Here, the lending institution typically waives the unpaid interest amount or closes the loan for a lesser amount than the outstanding balance.

How does loan settlement affect your credit score?

When you opt for loan settlement, the lender bears a huge financial loss in the form of interest income. They record the waived-off amount as a loss in their record books and notify the credit bureaus about it.

The credit bureaus -record the reporting by the lender and mark that account as Settled. This means the loan settlement will appear as a -Settled on your credit profile -. It depends on the lender with whom you have applied to obtain new credit on how they view this information. The lender will also consider the time lapse between when the credit facility was settled and the new credit application made to arrive at the lending decision.

Can you get a new credit after loan settlement?

Securing new credit after settling a loan can be challenging, but it’s certainly achievable. To improve your chances, you need to focus on getting your finances in order and boosting your credit score. The following strategies can help:

Avoid Multiple Loan Inquiries - Understand that securing a new loan immediately after settling a previous one will be tough. If your application is denied, resist the urge to reapply right away. Repeated loan applications to various lenders will be recorded as hard enquiry which -may impact your credit score and history. Lenders may view this as “credit-hungry” behaviour, which suggests poor financial management. Instead, focus on improving your credit score before applying for new credit.

Apply for a Secured Loan - While obtaining an unsecured loan, such as a personal loan, may be difficult with a loan settlement remark on your credit report, you can still qualify for a secured loan. By pledging an asset of equal or greater value than the amount you wish to borrow, you may increase your chances of approval.

Pay other debts and Use Your Credit Card Responsibly - Credit cards can be a useful financial tool, but it’s important to use them wisely. While you may have access to a credit card loan based on your credit limit, it’s best to avoid these due to high interest rates. Missing an EMI (Equated Monthly Instalment) can quickly increase your debt burden. Keep your credit utilisation ratio balanced, avoid unnecessary purchases, and use your credit card carefully. Over time, this will help you manage debt, improve your credit score, and increase your chances of getting approved for future credit.

Conclusion

Loan settlement should be considered as a last resort; it adversely impacts your credit profile impacting your credit score. It also makes financial institutions wary of your financial condition and hesitant to lend in the future. It is always advisable to pay your outstanding in full instead of settlement. However if you are unable to pay off the loan, please check with your lender on possible options with minimal impact on your credit worthiness. It is also advisable to monitor your CRIF credit report and score frequently.