Choosing between loan settlement and loan closure can significantly impact your credit score and financial future, so it’s essential to understand the long-term consequences of each option. When you take out a personal loan, the ideal scenario is to repay the full amount with interest over time.
However, life can take unexpected turns, and financial challenges can make it difficult to keep up with loan repayments. If you’re struggling with debt, you may have heard of two possible solutions: loan settlement and loan closure. But what do these terms mean, and which is the best option for you?
This blog will explore the differences between loan settlement and loan closure, how each impacts your financial future, and when you should consider either option.
What is Loan Closure?
Loan closure refers to the process of paying off your personal loan in full, either as per the original repayment schedule or earlier through pre-closure. Loan closure signifies that you have met all your loan obligations, and the lender considers your loan account as fully settled.
Two Types of Loan Closure:
There are two main types of loan closure: regular loan closure, where the borrower repays the loan as per the scheduled EMIs, and pre-closure, where the loan is paid off in full before the agreed-upon term. Both options mark the loan as fully repaid, but pre-closure may involve additional charges.
- Regular Loan Closure: This happens when you complete your loan repayment according to the agreed-upon schedule, paying off all EMIs until the loan term ends.
- Pre-Closure: If you have the means to pay off the loan before the tenure ends, you can opt for pre-closure by repaying the outstanding balance in a lump sum before the scheduled date.
What is Loan Settlement?
Loan settlement, on the other hand, occurs when a borrower is unable to repay the entire loan amount and negotiates with the lender to pay a reduced amount in a lump sum. The lender accepts this reduced amount as a “settlement,” and the loan is considered closed. However, in a loan settlement, the loan is not fully repaid as per the original terms, negatively affecting your credit report.
Key Differences Between Loan Settlement and Loan Closure
Impact on Credit Score
- Loan Closure: When you close a loan, whether through regular closure or pre-closure, it positively impacts your credit score by showing you met your loan obligations.
- Loan Settlement: In contrast, loan settlement negatively impacts your credit score, as the lender marks it as “settled” rather than “paid in full,” signaling difficulty in repayment.
Future Loan Approval
- Loan Closure: After a successful loan closure, you’re seen as a low-risk borrower, increasing your chances for future loan approvals with better terms.
- Loan Settlement: Opting for a loan settlement can make it harder to obtain future loans, as lenders may view you as a higher-risk borrower.
Financial Obligation
- Loan Closure: Whether through installments or pre-closure, loan closure requires repaying the full loan amount with interest.
- Loan Settlement: In loan settlement, you pay a reduced amount, often 40-60% of the outstanding balance, providing short-term relief but with credit consequences.
Negotiation and Timeframe
- Loan Closure: With loan closure, repayment terms are predefined with limited room for negotiation unless pre-closure is pursued.
- Loan Settlement: Loan settlement requires negotiation, and the process can take time, with no guarantee that the lender will accept a settlement.
When Should You Consider Loan Closure?
Loan closure is the ideal choice for borrowers aiming to maintain a good credit score and stay in good standing with lenders. Consider loan closure if:
- You have a stable income and can meet your loan obligations as scheduled.
- You can pre-close the loan early to save on interest.
- You have future borrowing needs, such as for a home or vehicle, where a high credit score is beneficial.
When Should You Consider Loan Settlement?
Loan settlement is suitable for borrowers facing severe financial hardship. Consider loan settlement if:
- You’re struggling with financial distress, such as job loss or medical emergencies.
- You want to avoid legal action due to defaulting on your loan.
How SolvFree Can Help You Decide
Deciding between loan settlement and loan closure is not easy, and the right option depends on your financial situation. At SolvFree, we provide expert guidance to help you make an informed choice between loan settlement and loan closure, ensuring the best financial outcome for you.
Summary
Both loan settlement and loan closure are ways to resolve debt, but they have different impacts on your credit and financial future. Loan closure is ideal for maintaining a good credit score, while loan settlement offers short-term relief but may affect your future creditworthiness. SolvFree is here to help you choose the best option between loan settlement and loan closure to become debt-free.
