Does One Time Settlement of Education Loan Affect CIBIL Score?

Education has become extremely expensive. It is, therefore, not very surprising that many people opt for education loans to fund their children’s education. Unfortunately, things do not always go as planned. Sometimes, students find it difficult to find a job after completing higher studies, which puts the onus of loan repayment entirely on the parents. Other times, life takes an unexpected turn and forces us to handle situations we are not prepared for, leaving us feeling financially strained. When a borrower finds it difficult to afford monthly education loan EMIs, they can approach a lender and explain their situation to them. In this case, if the borrower is finding it difficult to clear EMIs due to a genuine issue, the lender may agree to the settlement of the education loan.  

What is Education loan settlement?

Writing off an education loan essentially means paying the outstanding amount before the stipulated or agreed period due to an unfavourable financial situation. In such a case, a borrower may reason with their lender to reduce the outstanding amount and pay a lesser amount.  The lender might agree to settle the loan if the case is genuine. However, settling an education loan will reflect poorly on your credit report and will have a negative impact on your credit score.  

Also Read: Impact Of a Co-Applicant’s CIBIL Score On Your Home Loan Application 

Once the borrower and lender reach an agreement and the loan is settled, the lender informs the credit information agencies that the loan has been settled. The credit information agency, thereafter, changes the loan status from ongoing to settled in the credit report.  Let us take a look at how the credit score will get affected.  

Planning to Settle Your Education Loan? Here’s How This Will Affect Your Credit Score

Once you have settled the education loan, the first thing that your lender will do is inform credit information agencies. Credit information agencies do not consider it good credit manners to settle a loan before time. Therefore, once you settle the loan account, credit information agencies will not show the loan as closed in your credit report. Instead, they will label the account as settled. Settled loan accounts cause a borrower’s credit score to drop by almost 75 to 100 points. Further, though with time, you will be able to mend your CIBIL score or credit rating by practising good financial habits, the information that you once settled a loan will remain on your credit report for a good 7 years and this will stop other lenders from offering you a loan in future. This is the reason why borrowers are advised against opting for the settlement of an education loan.  

How to Improve Credit Score after Settling an Education Loan?

If you have settled an education loan, your CIBIL score will drop immediately. Here are a few things you can do to improve your credit score after loan settlement.  

The first thing you must do after settling an education loan is never to make the mistake of missing loan EMIs and credit card payments. After a loan settlement, your CIBIL score will automatically go down and therefore, you cannot afford to make any mistakes that might push it further. So, set up reminders and auto-payments and make sure you are paying all bills and EMIs on time.  

Another mistake you should not make is exhausting the limit on your credit card. Do not make any big purchases on your credit card and do not keep paying only the minimum amount due as both these things will reduce your credit utilization ratio and therefore, your credit score.  

Limit loan and credit card applications for a few months. As is, with the tag ‘settled’ on your credit report, very few lenders will show a willingness to give you credit and a loan or credit rejection will further reduce your credit rating. 

Following these tips will help you improve CIBIL score quickly after an education loan settlement. However, know that a good CIBIL score may not be enough to convince a lender to offer you a loan as lenders see loan settlement as a major issue. Therefore, borrowers are advised to try their best to not settle loans.