Education Loan One-Time Settlement : Impact on Credit Score and How to Avoid it

Anil Verma took an education loan 6 years ago from a public bank. His initial plan was to complete his graduation, get a job and start repaying for the loan. But life isn’t as simple as we want it to be. The year he graduated, the market hit a new low and he wasn’t able to secure a job. He took up a part time job and tried to repay the loan, but the interest rate had accrued over time making the EMIs a heavy sum of money. After 90 days of not paying the EMI, he was considered an NPA (Non Performing Asset) by the bank. Time went by but the condition did not improve. It was clear that extending the time would do no good, to save himself from any legal trouble he approached the bank and presented them his case. The bank offered him an option of One Time Settlement.

OTS is an agreement by the bank and the borrower where the borrower is supposed to pay an agreed upon amount of the dues. One Time Settlement is usually done when the borrower cannot repay the loan and the interest accrued becomes more than the principal amount.

Impact on the CIBIL score

OTS can save you from legal troubles and constant visits by recovery agents but it affects your CIBIL score substantially. The bank reports it to CIBIL that the case is not closed but settled. This is recorded as negative credit behavior thus dropping your score. This settled record will be reflected in your CIBIL report for as many as seven years. This means if you’re looking for a loan or getting a credit card, the prospective lenders will be cautious of lending to you. It is highly likely that they will reject your application after seeing your CIBIL report.

How to avoid being in this situation?

Have a repayment plan in place from the beginning. Do not wait till the moratorium period gets over to start thinking about repayment. It is important that you have a backup plan in mind, to save yourself from trouble in case of market uncertainties.