Loan Closure vs Settlement: Loan closure and loan settlement both mean ending the loan, but they have completely different effects on your credit score and financial records. One boosts your confidence, while the other can harm it.
Loan Settlement vs Loan Closure: In today’s time, it is easy to take a loan, but clearing it properly becomes a headache for many people. Many people think that loan settlement and loan closure are the same thing, whereas the truth is completely different. Both terms sound similar, but they have completely different effects on your credit score, future loan approval and financial image. If you have ever taken a loan or are thinking of taking one, then it is very important to understand this difference. Because a small mistake can leave a stain on your credit report that doesn’t fade for years. So let us understand in simple words what is the difference between loan settlement and loan closure and which one is better for you?
What is Loan Settlement?
When a person is unable to repay the entire loan amount, he talks to the bank and compromises on a lesser amount. For example, if someone has a loan outstanding of Rs 2 lakh, the bank can close the case by taking Rs 1.2 lakh. This is called loan settlement. But it should be noted that this can cause your credit score to fall badly. Because it is shown as ‘settled account’ in the report, it may become difficult to get new loans in future.
What is Loan Closure?
If you repay the entire loan amount, both principal and interest, it is called loan closure. This can happen in two ways. By paying all the EMIs on time or by paying a lump sum amount. This increases your credit score and makes it easier to take a loan in future. After closing the loan, take No Objection Certificate (NOC) from the bank, so that there is no problem in future.
What is the difference between loan settlement and loan closure?
1. Repayment amount
In loan settlement, you do not pay the entire amount, but end the matter by paying some part after negotiation with the bank. In loan closure, you repay the entire loan amount including principal and interest, that is, you do not have any outstanding dues from the bank.
2. Impact on credit score
Settlement has a negative impact on credit score. Your account is written as ‘settled’ in the credit report, which reduces your credibility. The effect of closure is positive on the credit score. ‘Closed’ is written in the report, which increases your credit score.
3. Impact on future loans
The next time you take a loan during settlement, the bank may consider you as a risky borrower. If the loan is closed properly in closure, new loans are easily approved and the interest rate can also be lower.
4. Documentation
For settlement, a settlement agreement is signed with the bank, which shows that you have settled the account by making a partial payment. At closure, you get NOC (No Objection Certificate) and loan closure letter from the bank, which states that you have repaid the entire loan.
5. Charges and Taxes
Penalties or taxes may apply in the settlement. There are sometimes foreclosure charges involved in closure, but it does not cause any financial loss.
Which option is right for you?
If you can truly repay the loan, loan closure is best. This strengthens your financial record and can help you get loans at cheaper interest rates in future. But if you are in financial crisis and it is difficult to pay the full amount, then only take the help of loan settlement, that too with a written agreement is considered correct.
Disclaimer: This article is for information only. This is not financial, legal or investment advice of any kind. Before taking any decision related to loan, definitely consult your bank, financial advisor or credit counselor.
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