Getting a loan can be challenging, but closure of a loan can be challenging too. Whoever wants to close a loan, must know these 5 things, otherwise you can regret. Actually, there are some differences between loan closure and loan settlement.
When someone is unable to repay the full loan amount, they negotiate with the bank to settle for a lower amount. For example, if someone has a loan outstanding of ₹2 lakh, the bank may accept ₹1.2 lakh and settle the case. This is called loan settlement. However, it’s important to note that this can severely impact your credit score. This is because it’s listed as a “settled account” in the report, making it difficult to obtain a new loan. If  you repay the entire loan amount, both principal and interest, it’s called loan closure.
This can be done in two ways: by paying all EMIs on time or by paying a lump sum. This increases your credit score and makes it easier to obtain a loan in the future. After the loan is closed, be sure to obtain a No Objection Certificate (NOC) from the bank to avoid future problems.
What is the difference between loan settlement and loan closure?
1. Repayment amount
In loan settlement, you don’t pay the entire amount; instead, you negotiate with the bank and settle the matter by paying a portion. In loan closure, you repay the entire loan amount, including principal and interest, meaning you no longer owe the bank.
2. Impact on credit score
Settlement has a negative impact on your credit score. Your account is listed as “settled” in your credit report, which reduces your creditworthiness. Closure has a positive impact on your credit score. It is listed as “Closed” in the report, which increases your credit score.
3. Impact on future loans
Settlement can make the bank consider you a risky borrower the next time you borrow. Properly closing a loan can help you get approved for new loans more easily and you may even receive a lower interest rate.
4. Documentation
Settlement involves signing a settlement agreement with the bank, which indicates that you’ve settled the account with a partial payment. Closure involves receiving a NOC (No Objection Certificate) and a loan closure letter from the bank, which confirms that you’ve repaid the entire loan.
5. Charges and Taxes
Settlement may involve penalties or taxes. Closing sometimes involves foreclosure charges, but it doesn’t result in any financial loss.
