Sometimes life throws curveballs—job loss, illness, or family emergencies. When repaying a loan on time becomes impossible, loan settlement feels like the only way out.
It’s also called a One-Time Settlement (OTS). You sit down with your bank, explain your situation, and agree on a lump-sum payment that’s usually less than what you owe. It helps stop the EMI pressure, recovery calls, and mounting penalties.
Here’s the Hidden Risk Most People Miss
When you settle a loan, the bank doesn’t consider it “fully repaid.” They mark your credit history with a “Settled” status, not “Closed.”
That one word can do a lot of damage.
What happens next?
- Your CIBIL score drops sharply.
- You may get blacklisted from getting future loans or credit cards.
- The damage can last up to 7 years.
Why? Because banks and credit bureaus see “settlement” as a sign that you didn’t fulfill the original loan agreement. Even if you had a valid reason, the system doesn’t always understand your struggle.
What You Should Do After Settling a Loan
So here’s the big tip—don’t stop at settlement. Once your financial situation improves, there’s one more step that can save your credit score:
This process is called loan closure, and it changes the loan status from “Settled” to “Closed” in your credit report.
Why does that matter?
Because only a “Closed” status tells future lenders that you’ve cleared everything you owed. It wipes the slate clean and gives your credit score a second chance.
How to Properly Close a Settled Loan (Step-by-Step)
Here’s what to do once you’re financially stable again:
- Contact your bank. Ask them for the remaining balance post-settlement.
- Pay the pending amount. This may include the waived penalties or interest.
- Get the No Due Certificate (NOC). This is proof that you’ve cleared the entire loan.
- Request a loan closure letter. It confirms that the account is now officially closed.
- Wait 30–45 days. The bank will notify CIBIL and update your credit report.
That’s it. Five steps—and your credit health starts to bounce back.
Why Loan Settlement Isn’t a “Free Pass”
Let’s be real—loan settlement helps when you’re drowning. It gives you space to breathe. But it’s not a free ticket to becoming debt-free. Here’s why:
- The bank loses money on the settlement deal.
- They mark your file as “high risk.”
- Your credit score can drop by 100 points or more.
- New lenders may reject your applications, even years later.
So if you can, always aim to close the loan eventually, not just settle it.