Many borrowers assume that
loan closure and
loan settlement are the same thing. While both involve paying off a loan, the impact on your
credit score and financial profile is quite different. Understanding these differences is crucial for maintaining good credit health.
🔹 1. Loan Closure
·
Definition: Loan closure occurs when you
repay the entire loan amount along with all interest as per the original schedule.·
Impact on Credit Score:o Positively affects your credit history.o Shows lenders that you
honor your repayment commitments.o Can improve your
loan eligibility and interest rates for future loans.·
Example: If you have a home loan of ₹10 lakh for 10 years and pay every EMI on time until the last payment, the loan is
closed.
🔹 2. Loan Settlement
·
Definition: Loan settlement happens when you
negotiate with the lender to pay a lesser amount than the total outstanding to clear the loan.·
Impact on Credit Score:o Usually
negatively affects your credit score, because it indicates
early repayment due to financial stress or inability to pay full EMIs.o Lenders may flag this in your
credit report, making it harder to get loans at low interest rates in the future.·
Example: If your total loan outstanding is ₹5 lakh, but the bank agrees to accept ₹4 lakh as full and final settlement, it’s a
settlement.
🔹 3. Key Differences at a Glance
FeatureLoan ClosureLoan SettlementPayment AmountFull principal + interest as agreedLess than total outstandingCredit Score ImpactPositiveNegativeFuture Loan ProspectsBetterMay reduce eligibility or increase interest ratesReasonPlanned repaymentFinancial difficulty / negotiation
🔹 4. How to Minimize Credit Score Impact
· Pay
settlement amount promptly after negotiation.· Inform
credit bureaus once the loan is settled.· Maintain
on-time payments for other loans to offset any negative impact.· Avoid multiple settlements in a short period, as it
signals financial instability.
✅ Key Takeaways
·
Loan closure is always better for your credit score than settlement.·
Settlements should be a last resort when you are unable to pay the full loan amount.· Understanding the difference can help you
make informed decisions and protect your financial reputation.
Disclaimer:The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization, employer, or company. All information provided is for general informational purposes only. While every effort has been made to ensure accuracy, we make no representations or warranties of any kind, express or implied, about the completeness, reliability, or suitability of the information contained herein. Readers are advised to verify facts and seek professional advice where necessary. Any reliance placed on such information is strictly at the reader’s own risk.