Many borrowers often confuse loan settlement with loan closure, but understanding the distinction is essential for maintaining a healthy credit profile. Here’s a detailed breakdown of the differences and their impact on your financial life:
1️⃣ Definition Matters
· Loan Settlement: Paying less than the total outstanding amount agreed upon with the lender to close the loan prematurely.
· Loan Closure: Paying the full outstanding amount along with interest and charges, completing the loan as per the original terms.
2️⃣ Impact on Credit Score
· Loan Settlement: May negatively affect your credit score, as it indicates that the borrower could not repay the full loan.
· Loan Closure: Has a positive impact, showing timely and complete repayment, which enhances creditworthiness.
3️⃣ Future Loan Eligibility
· Loan Settlement: Lenders may view you as higher-risk, potentially leading to higher interest rates or stricter eligibility for future loans.
· Loan Closure: Improves your loan eligibility, making it easier to secure future credit at better rates.
4️⃣ Financial Implications
· Loan Settlement: May save short-term money but could involve negotiation fees or tax implications.
· Loan Closure: Might be costlier upfront but ensures long-term financial benefits like better credit history and lower borrowing costs.
5️⃣ Legal and Documentation Differences
· Loan Settlement: Requires a mutual agreement between borrower and lender; often comes with settlement letters.
· Loan Closure: Involves standard loan closure documents, No Objection Certificates (NOC), and updates in the credit bureau.
✅ Key Takeaways
· Settling a loan may seem attractive for immediate relief but can impact your financial reputation and credit score.
· Closing a loan fully ensures a clean credit history, better financial credibility, and future borrowing ease.
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.
click and follow Indiaherald WhatsApp channel