Loan Settlement is often mistaken with the term loan closure. But these are two different terms. Loan settlement means when a borrower fails to repay a loan due to unavoidable circumstances. Debt settlement, debt relief, or debt resolution are other terms used for loan settlement.

On the other hand, when individuals pay their monthly instalments on time and repay the loan as per the loan repayment schedule given to them at the time of disbursement, the loan account is termed as 'loan closure'.

How Does Loan Settlement Work?

In the case of a loan settlement, the borrower needs to inform the lender about the unavoidable situation and ask for some time to start repayments. If the lender finds that the borrower is genuinely unable to repay the loan dues, a settlement offer is made. The lender may grant a one-time settlement option.The reason may be an illness, injury or job loss. After settling the loan in one go, the loan status will be recorded as a settled loan in the borrower's credit report.

Since it is not a usual closure,loan settlement shows negative credit behaviour with a drop in the credit score.

Unsecured loans are settled by lending instaitutions under certain circumstances. Settling a secured loan is generally a tough proposition, which in most cases may not be feasible, especially like a home loan. Apply online for a loan as an informed user to avoid situations where you are found asking for a loan settlement.

How to Improve CIBIL Score After Settlement

A Good credit score of 700+ helps lending institutions decide whether a person is creditworthy and can repay the loan or pay the credit card bill on time. A high credit score means the better the chances to secure credit at favourable terms. Rebuilding the credit score is inevitable.

Here borrowers can understand how to improve CIBIL score after settlement:

1. Convert 'Settled' to 'Closed' Status
   Changing the loan account status from 'Settled' status to 'Closed' with the lender is one of the simplest ways to improve the credit score. Pay off all your debts once to change the status within the stipulated time. It is a 6-month period and can be extended depending on the seriousness of the matter. If the debt is really high, talk to the lender for negotiated terms.
    
2. Make Regular Payments
   Repayment history is an important factor that plays a part in determining somebody's credit score. One-third of a borrower's credit score depends on the length and clean credit history. One of the most effective ways to rebuild a credit score is to make all credit card payments fully and before the due date. It gives an immediate and significant impact on credit scores.
    
3. Reduce the Credit Utilisation Ratio
   Experts suggest keeping the credit utilisation ratio low, ideally 30%. It will not only help improve the credit score but reduce debts. A small amount of debt can be paid easily in full and on or before the due date which ultimately adds to the borrower's creditworthiness and adds to credit score.
    
4. Discontinue Using Full Credit Limits
   Many borrowers aim at improving their credit profiles by holding back on fully utilising the assigned credit limits on their cards. Keep in mind that borrowers have to use their credit to rebuild their credit scores. It is necessary that borrowers possess a long and spotless credit history. Their credit score will improve only if they show responsible credit behaviour. A lack of credit activities may lead to a drop in your score.
    
5. Accept Pre-approved Increased Credit Limits on Cards
   If individuals are offered increased credit card limits, they should accept them. Previous sound credibility with an institution can help borrowers to enjoy a higher credit card limit. An increased credit limit, especially on old cards, signifies the reliability of the borrower and adds to their credit score.
    
6. Avoid Making Loan Queries
   After the loan settlement, borrowers should not consider taking further action to get credit. It indicates a credit-hungry prospect. Avoid making an application or placing a query for a new loan for a few months of the loan settlement transaction. It may lead to loan rejection and can further tumble their credit score. Just focus on repairing a hurt credit score and do not seek further credit.

Borrowers must first try to avoid situations like loan settlement and try to negotiate on extended loan tenure with the lender. If the situation is unavoidable, follow the tips given above to rebuild the credit score.

Reference:

• https://www.grihashakti.com/knowledge-centre/how-to-improve-your-cibil-score-after-a-loan-settlement.aspx
• https://timesofindia.indiatimes.com/blogs/voices/ways-to-build-credit-score-after-a-loan-settlement/