Loan Closure Vs. Loan Settlement: Meaning, Benefits, and CIBIL Score Impact

Taking loans from Banks and Non-Banking Financial Companies (NBFCs) is an effective solution to address financial emergencies. This also leads to an understanding of why it is important to manage loans with utmost sincerity. As a borrower, one must understand the difference between loan settlement and loan closure involved in the process of loan repayment. Doing this ensures that there is no negative impact on borrowers’ financial health. Borrowers often misunderstand loan settlement with loan closure. However, in their entirety, they are completely different in terms of their approach to loan repayment and the implications they have on financial health. Both of these terms and their impact on the CIBIL score are explained below. The importance of understanding their differences is that it can help you make informed decisions and manage your finances better.

Table of Contents:

What is Loan Closure
What is Loan Settlement

What is Loan Closure?

Loan closure refers to the complete repayment of a loan, including interest and other applicable charges. Post payment, the lender issues a ‘No Objection Certificate’ to the borrower, stating the same. The certificate/letter acts as a confirmation that there are no dues on the borrower's end. Loan closure takes place either after making the last EMI payment or by paying the whole amount at once before the completion of the loan tenure, which is known as foreclosing. Your payment activity on loan closure is being noticed by credit agencies. A good history eventually helps in future borrowing, boosts your credit score and allows you to avail of other loan-related products.

What is Loan Settlement?

A loan settlement, on the other hand, is a type of negotiation that borrowers make with the lenders when they cannot repay the full loan amount. This takes place when a borrower is facing financial difficulty, and as a result, the settlement allows them to clear the debt by paying a little less. Taking this step is ideal when you have defaulted or are about to default on your EMIs. For instance, if you owe the lender ₹5 Lakhs or more and are facing some issues in paying, the negotiation may allow you to clear the loan by paying 10% less or maybe more. The amount may vary because it depends on the terms and conditions of the loan settlement between you and your lender. This approach must be the last option because it will be marked as ‘settled’ on your credit report, impacting your credit score negatively.

Benefits of Loan Settlement

Loan settlement offers the borrower a sense of relief from debt by paying less than what they actually owe.
Signing a loan settlement agreement with your lender avoids defaulting on the loan, eliminating the consequences that you can face.
Loan settlement acts as an instant resolution for being debt-free in the shortest period of time, as they are unable to make repayments in the long term.

Benefits of Loan Closure

Foreclosing a personal loan when initiated by the borrower helps them save a substantial amount of money on interest.
Loan closure with sincerity helps borrowers build a good credit history as well as improve their credit score.
Eliminates financial worries and improves the debt-to-income ratio, which is crucial for availing car loans, home loans, etc.

Impact of ‘Settled’ Status on CIBIL Score

Lenders view this status as risky.
The status will be on CIBIL records for over 7 years.
Your score might drop from 75 to 100 points.

Impact of ‘Closed’ Status on CIBIL Score

Improves your credit score.
Positive impact on debt-to-income ratio.
The closed status will reflect on your CIBIL score around the 10^th of every month.

Making payments and closing your loan as per the SOPs can help you in many ways, like improving your credit score and reducing your debt-to-income ratio. All of these are essential for you to avail of other loan-related products. Loan settlement should be the last option for borrowers in financial distress, as it can have a negative impact on your credit report for years. To avoid such situations, you can avail secured loans such as a gold loan offered by Muthoot Finance. It is the easiest way to fulfil your financial needs and has proved time and again as a sensible alternative to availing loans.