Loan Settlement vs Loan Closure:
Many people take personal loans, home loans, or car loans from banks to meet their needs. After taking a loan, it is very important to repay it on time. Good repayment improves your credit profile and helps you get new loans easily. In this situation, two important terms are commonly used: Loan Settlement and Loan Closure. These two are very different, and each one affects your CIBIL score differently.
Loan Settlement happens when a borrower is unable to repay the full loan amount due to serious financial problems. In such cases, the borrower requests the lender to accept a lower amount instead of the full amount. The bank may agree after checking the borrower’s financial difficulty. Once this reduced amount is paid, the loan is marked as “settled”.
Loan Settlement offers temporary relief, because you do not have to pay the full amount. However, the impact on your credit score is negative. A loan settlement shows the bank that you failed to repay your complete loan. This reduces the CIBIL score and makes future loans difficult to get. Even if you get a loan later, the interest rate may be higher.
Loan Closure means closing the loan completely by paying the entire outstanding amount including principal and interest. It can be done in two ways: paying through regular EMIs until the end, or paying the full remaining amount early before the loan term ends. Closing the loan fully increases your CIBIL score. Your credit history becomes strong, and you will be able to get new loans easily.
Some loans may have a pre-closure fee if you pay early. After closing the loan, one must take a “No Dues Certificate” from the bank for confirmation.
Understanding these two options is very important. Whenever possible, choose Loan Closure because it improves your financial credibility. Loan Settlement should be considered only as a last option in severe financial trouble.
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