For borrowers struggling with Non-Performing Assets (NPA), the One-Time Settlement (OTS) scheme offers a lifeline, enabling them to settle their outstanding dues at a reduced amount. However, while OTS can provide immediate financial relief, it has significant implications for the borrower’s credit score and future borrowing capacity. At Finlender, we aim to guide borrowers through these complexities, ensuring they understand the full scope of their financial decisions.
How OTS Affects Credit Scores
When a borrower opts for an OTS, they essentially agree to pay back a portion of the loan rather than the full outstanding amount. While this resolves the NPA and stops further legal action from lenders, it doesn’t fully erase the negative mark from the borrower’s credit history. Credit bureaus typically record the OTS as a “settled” account rather than a “closed” one.
This distinction is crucial. A “settled” account indicates that the borrower did not pay the full amount initially agreed upon, which can have a lasting negative impact on the credit score. Depending on the borrower’s previous credit history, the drop in the credit score can be significant, potentially reducing it by 50 to 150 points. This decline reflects the borrower’s perceived risk and may affect their creditworthiness in the eyes of future lenders.
The Long-Term Impact on Future Borrowing
A lower credit score can severely restrict a borrower’s access to new credit facilities. Future lenders, when reviewing a credit report, may view a “settled” account as a red flag, indicating financial instability or a higher risk of default. This perception can lead to higher interest rates, reduced loan amounts, or outright denial of credit applications.
Furthermore, the impact of an OTS on credit scores can linger for several years. Borrowers might find it challenging to secure unsecured loans, like personal loans or credit cards, which rely heavily on credit scores for approval. Even secured loans, such as home loans or car loans, may come with stricter terms and conditions.
Steps to Rebuild Credit Post-OTS
At Finlender, we believe in empowering our clients with knowledge and strategies to rebuild their credit post-OTS. It’s essential for borrowers to maintain financial discipline by paying all future debts on time, keeping credit utilization low, and regularly monitoring their credit reports for inaccuracies. Over time, these steps can help improve their credit score and restore their creditworthiness.
Conclusion
While OTS can offer immediate relief from the burden of NPAs, borrowers should be aware of its potential impact on their credit score and future borrowing opportunities. At Finlender, we encourage borrowers to carefully weigh the pros and cons and to seek professional financial advice before proceeding with an OTS. Understanding the long-term implications can help borrowers make informed decisions that align with their financial goals.
