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I Have Already Settled With My Bank. Why Am I Still A Defaulter?


I Have Already Settled With My Bank. Why Am I Still A Defaulter?

  • By Saral Credit
  • May 06, 2022

Nowadays, every person wants to have their essentials at their home but with the condition of managing their financial health at the same time. So, the best way to cope with all the daunting procedures and the unwanted stress people are inclined toward different types of loans. It's now very easy to think of a car and having one in front of your house. Different types of loans like car loans, personal loans, gold loans, home loans, commercial loans, business loans, education loans, and many more make your life easy and comfortable. The point is that one must know all about the criteria and the eligibility required during applying. Credit score or the CIBIL score are the terms that a borrower must be aware of. It helps in having the best interest rates in any loan to alleviate all the unnecessary stress. Sometimes people without knowing all about the loans and the criteria required come out as defaulters.

What does Settlement Mean ?

Sometimes people get confused about loan settlement and loan closure. They both are different, and a person must know all about them before applying for any loan. If you are genuinely unable to repay the amount because of illness, job loss, injury, or any other reasons, you can talk to your lender and have some more time to make the next repayment. The lender will give you a one-time settlement option where you get some time and can settle the loan in one go.

If you pay off your monthly installment on time and complete it as scheduled, the lender will close the loan. While on the other hand, the process of forgiving a part of a borrower's loan amount to help the borrower repay the amount.

After Settling With The Bank, Why Is One Still A Defaulter?

After settling with the bank, there are various aspects where the defaulter is considered the defaulter. For example, if you have applied for a personal loan or any other loan and you are paying all the installments in time, you cannot repay some of the installments because of some genuine reasons. You settled with the bank, or we can say the bank gave you one settlement option, but still, you are a defaulter, so why does it happen. After settling with the bank, one must know some points to consider:

  • After paying the entire amount, one must have the bank's NOC (no objection certificate). The credit bureau will confirm this development with the bank and will change the status from settled to close within 30 days.
  • Your past credit will be at risk if you have settled on your loan status. If you have settled your loan with the bank, make sure you pay off the entire balance amount as soon as possible. If you have any repayment obligations, there are chances you might do this again.
    • Manage responsibly if you have more than one credit card or loan. Apply for credit cautiously.
    • Pay every due on time every time.
    • Monitor your credit score and always try to identify any information that can have a negative impact on your credit score.

Other checklists one must go for when settling with the bank to avoid coming up as a defaulter:

    • Always keep copies of all the written proofs from your lender
    • Calls are not considered the proof, so always make sure you have everything in writing.
    • Keep copies of the settlement letter by the lender or the bank.
    • Have your post-dated cheques and NOC
    • At last, after paying off all the amount, don't forget to have your loan account statement that shows zero balance.

Five Rights of Loan Defaulters

Once you are declared as the defaulter that can be because of many reasons but you must know all the rights you have as the defaulter:

Borrower's Privacy: Lenders sometimes take the help of recovery agents for the repayments of the loans; in that case, the borrower's privacy should be respected. The agent can visit their house or workplace specified by the borrower, and the timing should be between 7 Am and 7 pm.

Decorum and Civil Behavior: No agent is allowed to misbehave, whatever the reason is. Agent must visit with the concern of the borrower and at the time which suits the borrower.

Ensuring the Right Value: The lender starts the further processing, like the auction of your property, if you fail to pay the dues, and this will be done within 60 days' notice period. But before proceeding further bank should issue another notice specifying the right value of the property.

Right to be Heard: The borrower has the right to put his words in front of the bank or the agent. The borrower can explain every reason for the due installments.

Right to Ample Notice: Default does not make anyone a criminal; banks have to follow some rules like giving time to repay dues before repossessing your assets.

Let's understand the whole procedure with an example.

A person who has applied for a home loan, and after verifying or going through his credit reports, the bank accepted his application and gave the loan. He took a loan of 5 lakhs, where the repayment period is scheduled for five years. As per the scheduled period, he started paying off the installments. After three years, because of his illness and job loss, he could not pay off the amount and asked the bank for a settlement. Bank, after proper verification, settled his loan amount and gave him more time for the next repayment. But the point here is settlement can ruin his credit score, and per the status in his credit report, it shows settlement.

On the other hand, this settlement procedure made his life free from stress, and you have enough time to manage your financial hectic. But after you are capable of repayment and complete your due amount on time for the rest of the years, the status of your credit report changes from settlement to closure. But after the closure of his loan, he must have the NOC, and if he forgets to have the NOC from the bank, then in the future, he is considered to be the defaulter.

How Can A One-Time Settlement Impact Your Credit Score?

If you come up as a defaulter and have the call for the settlement from the bank's recovery, then do not rush out immediately to accept. Such a settlement can unsettle your credit history. This settlement is less than the amount outstanding on the bank's book. OTS, which is a one-time settlement, comes when one cannot pay up the interest accrued, which becomes more than the principle. The bank does not tell you that doing this is like admitting that you lack the ability to pay off the remaining amount to the bank. The bureau, on its part, will mention the settlement in your credit report that is always reflected in front of the lender.

Settling a loan means paying off a part of the total amount. The amount can sometimes be negotiated with the lender, but it is not less than the principal amount in most cases. After the settlement, the bank writes off the difference between the amount due and the amount paid from its books and reports it as a loss. Once the settlement is done, the bank will stop sending the recovery agents. Actually, the relationship between the bank and the customer is terminated after this, but the result is not fruitful for the borrower as the credit report doesn't help in the future for any kind of loan.

Clearing History: How Can You Do That?

It's not like you always have a bad credit score just because you have the "settled" flag. You can get rid of the settled flag from your credit report by paying off the waived amount later. This will not improve your credit report immediately, but the credit report DPD section shows that you had defaulted, and this they show in their reports for 36 months, the period for which you had defaulted.

Many things are there that a lender sees when accepting the application for the loans. A prospective lender will take into account the borrower's credit report, including the amount waived at the time of settlement and if you have paid all the waived off amount, and at what period.

To avoid these hassles, the best strategy is to pay off the entire amount in time as per it is scheduled. Always keep a check on the urge to overspend on borrowed money. Before applying for a loan, it is better to know all the bank's strategies and criteria and the particular loan system. Always maintain your financial health if you are paying installments. Never go for the extra expense, and better to save money to close the loan in time to maintain the credit score.