LOAN DEFAULTS: Settle old loan and then rebuild credit score to borrow again

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Defaulting on a bank loan has serious repercussions. When you fail to repay your loan, you are deemed to be a defaulter by the lender and the same is reported to the credit bureaus. This default can have several consequences such as tarnishing your credit score and affecting your financial credibility for an extended period, making it difficult to avail funds in the future.

Implications of loan default

The consequences of a default vary based on the type of loan you have defaulted on. If you default on a secured loan, the financial institution is within its legal rights to use the collateral and auction it to recover its dues. If you default on a personal loan, your credit score will be adversely affected, making it very difficult to avail loans or financial products like credit cards, etc. So the first step is to settle your outstanding dues after negotiating with the lender.

Busting myths

Defaulting on a loan creates a negative entry in your credit history, which can remain on record for a certain period. However, you can borrow again if you can streamline your finances and repay your debt. Avoid delayed or missed payments, and if possible, automate your crucial payments so that you don’t ever forget to pay your debts on time.

Improve your credit score

Your credit score may have dropped to a level from where it may seem impossible to revive it again. But you can work on it and take it back to a good position. Adhil Shetty, CEO,, says, “Your credit score is not set in stone; it’s an opportunity for improvement. Pay your bills promptly, reduce your debt burden, and review your credit report for errors. Establish a positive payment history and diversify your credit types. Maintain older accounts and avoid frequent credit applications.”

When you can apply again

Wait for a substantial period after defaulting before applying for a new loan.Over time, as your credit score improves, lenders may be more willing to consider your loan application.

“Once you have improved your credit score, you may be able to apply for a loan again. However, you may still face some challenges. Some lenders may be reluctant to approve your loan application or may charge a higher interest rate. Despite this, there will be several lenders who may be willing to give you a loan seeing improvements in your current income and credit records built over time,” Shetty adds.

While applying for a loan after a previous default, make sure that you understand the terms of the loan and can afford the monthly payments. Compare interest rates from different lenders to avoid high interest rates and EMIs. Keep your EMI as much as it does not hamper your other financial commitments. Finally, apply for a loan only if you have a specific financial goal or need.


  • If you default on a loan, the credit score takes a significant hit, making it difficult to get a new loan
  • Start building a positive payment history again with timely payments
  • As your credit score improves, lenders may be more willing to consider your loan application


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