Most people consider loan closure and loan settlement to be the same process. However, there are significant differences between the two processes, which impact their credit profile and future loan prospects.

Loan closure vs. loan settlement: Many people take loans from banks to meet their financial needs. Most repay the loan amount. However, some people are unable to repay the loan. In such a situation, they settle the loan with the bank. This is an easy way out, but it can also cause problems in the future.

Most people consider loan closure and loan settlement to be the same process. However, there are significant differences between the two processes, which impact their credit profile and future loan prospects. Therefore, you should understand both processes so that you can choose the right option for yourself.

Loan Closure

Under loan closure, the customer repays the entire loan amount to the bank. Both the loan interest and principal are paid. The customer can choose between EMIs or a lump sum payment. Loan closure does not negatively impact your credit score.

This is proof that you have fulfilled your obligation and paid the full loan amount to the bank. After loan closure, the bank also issues you a No Objection Certificate. Furthermore, if you choose loan closure, you will not face any problems in obtaining a loan in the future.

Loan Settlement

When a customer is unable to repay the loan amount to the bank, they negotiate with the bank and reach a settlement by paying a small amount. This is called loan settlement. Banks often settle loans when the customer's financial situation is extremely difficult.

In a loan settlement, the bank waives some amount. If a person settles their loan, their credit score is affected, making it difficult to obtain a loan or credit card in the future.

Which option is correct?

Before choosing between loan closure and loan settlement, customers should assess their financial situation. If the situation is currently bad, they should choose loan closure. However, if the prospects for future improvement are slim to none, loan settlement may be the option. However, it is important to consult a financial advisor before selecting either option.