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What is the impact of the one-time settlement of education loans on the CIBIL™ score?

The first step after writing off an education loan or settling an education loan is informing the same to CIBIL™ and other credit agencies. Settling the education loan amount is not a normal course of business. Hence, it is reported and reflected separately in the credit report of the person.

Such settlement has to be marked as ‘settled’ in the credit report by the relevant credit rating agencies in order to alert the other potential lenders of the negative credit behaviour of the applicant. The result of such a settlement is a drop in the credit score of the applicant. The record of settlement is included on your CIBIL™ report for a period of seven years. A request for another loan by the applicant in such years can warn the lenders about the risk of default in repaying the loans provided by the bank. This may lead to a rejection of the loan application.

Education loans are among the popular loan products that are provided by banks and other financial institutions like Non-Banking Financial Institutions. Education loans can be availed by eligible applicants to pursue their higher education. Higher education can be within the country or abroad. Many banks provide specific conditions with regards to higher education being pursued in India or abroad. The education loans provided by lenders are based on the credit score of the applicants apart from other eligibility parameters set by the bank in this regard.

What is a credit score?

A credit score is the rating issued by competent credit rating agencies for any person or business entity. The credit score is the quantification of the creditworthiness of a person. When applicants apply for a loan or credit card application, the first point of reference for any lenders in reviewing such application is their credit score. In India, there are our credit rating agencies that provide credit score for applicants. These agencies are,

  • CIBIL™
  • Equifax
  • Experian
  • CRIF Highmark

CIBIL™ is one of the most favoured credit rating agencies from the above-mentioned list for considering a loan application or a credit card approval. The credit score issued by CIBIL™ score is issued in the range of 300 to 900. A CIBIL™ score closer to 300 is considered to be a poor credit score and a credit score closer to 900 is considered to be a favourable credit score by the lenders.

What is loan settlement?

There are many cases when the loan taken by the borrower cannot be repaid on time. When such default is persistent, the borrower may approach the bank explaining the reasons for such default. If the reason for such default is genuine like illness, injury, job loss, or some other reason. The bank may then offer the borrower a one-time settlement option upon their request.

In such a case, the borrower can take some time off and then pay or settle the amount due in a single instalment. Once the applicant accepts the bank’s offer to settle the loan and pays the agreed amount, the status of the loan in the credit report is changed or recorded as ‘settled’ in the credit report.

FAQs

1. Does settlement of education loan impact the CIBIL™ score of a person?

A. Yes settlement of education loan will have a negative impact on the CIBIL™ score of a person.

2. How long does CIBIL™ maintain the record of the settlement of the loan?

A. CIBIL™ will maintain the record of the settlement of loan for a period of 7 years

3. What are the measures that can improve the credit score of a person?

A. Some measures that can improve the credit score of a person are,

  • Paying the credit card dues or loan EMIs on time
  • Maintaining the ideal credit utilization ratio
  • Not applying for loans or credit cards through multiple lenders at the same time
  • Reducing external liabilities significantly
  • Reporting any errors or fraudulent entries in the credit report of the applicant

4. What are the possible reasons for the rejection of the education loan application?

A. The possible reasons for rejection of education loan application are,

  • Bad credit history or lower credit score
  • Non-compliance with age parameters
  • Applying for too many loans or credit cards
  • Lower monthly income

5. Is part payment of loan the same as settlement of loan?

A. No. Part-payment of loan is when the borrower has sufficient repaying capacity and wants to reduce the principal loan amount to eventually reduce the interest burden. Settlement of loan on the other hand is when the borrower is not able to repay the loan taken in full and agree to pay an amount lower than the outstanding amount which is agreed between lender and borrower.

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