Loan Settlement vs Full Repayment: Pros, Cons and Credit Score Impact. While in debt, two possible roads are the prime consideration for borrowers, loan settlements or full repayments. Both set the debt, yet their impact on finance and credit varies vastly.

Loan Settlement

A loan settlement means a borrower and lender settle for less than the full loan balance with some agreement in place. This type of settlement usually happens when it is absolutely impossible for the borrower to redeem the loan.

Pros:

Immediate relief from the debt burden.

The lender avoids a long process of law.

Cons:

A note on “settled” is marked against the credit report, thus harming the credit score.

Reduces eligibility for future loans for several years.

Full Repayment
Full repayment is where the borrower repays the entire outstanding amount along with interest as per the terms laid down under the loan agreement.

Pros:

Helps in maintaining or improving the credit score.

Increases credibility in the eyes of banks, thus enhancing chances of further loans.

Keeps you exempt from any penalties or legal consequences.

Cons:

Greater financial commitment.

May affect cash flows in the short run.

Credit Score Impact
Full repayment of loans is viewed by credit bureaus as financial discipline and is thus rewarded with credit scores/rating; while, on the other hand, loan settlements are considered risky and thus bring down a person’s score by about 75-100 points if not more. The risk of being “settled” could be shown on the person’s report for as long as 7 years, thus making him less attractive to lenders.

Bottom Line: If full repayment is a practical option, then one must opt for it because it is for one’s credit health and ability to borrow in future. Therefore, a loan settlement must remain the option of last resort to be entertained only when repayment becomes impossible and all other alternatives such as restructuring plans or extending the tenure have been exhausted.

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