A **personal loan** is an amount of money that you can borrow from a bank, credit union, or online
- High Spy
- Sep 26, 2023
- 2 min read
A personal loan is an amount of money that you can borrow from a bank, credit union, or online lender for various purposes such as consolidating debt, home renovations, or planning a wedding². Personal loans are typically unsecured, meaning they don't require collateral. Instead, lenders consider your credit profile, income, and debts during the loan approval process³.
When a personal loan is settled, it means that you have negotiated with your creditors to pay less than the full amount you owe. This typically happens when you're unable to meet your monthly payments or your bills have gone to collections⁶. Debt settlement can have some intense consequences for your credit score. It is considered negative by the scoring model to the same extent as a charge-off or an account included in bankruptcy or repossession⁶. Here's how debt settlement can impact your credit score:
1. Payment history: When you begin the process of debt settlement, you'll be encouraged to stop paying your monthly payments to your creditors. Since payment history makes up 35% of your credit score total, stopping payments will cause your credit score to drop⁶.
2. Credit utilization: Not making payments will also affect your credit utilization, which makes up 30% of your credit score total. Credit utilization is determined by looking at your ratio of debt to available credit. If you're carrying an excessive balance due to non-payment and late fees, your credit utilization will be well over the ideal range of 10-30%⁶.
3. Credit report: Going through debt settlement can cause your credit score to decrease by at least 100-125 points. The months of missed payments will show up on your credit report as delinquencies, which stay on your report for seven years from the first missed payment⁶.
It's important to note that settling debt won't hide the record of missed payments and may make it difficult for you to get a loan or credit in the future⁶⁸. If you're considering debt settlement, it's advisable to consult with a financial professional who can provide personalized guidance based on your specific situation.
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