Paid in full vs settled in full: Which is best for my loans?

While both terms refer to closed accounts, only one can negatively affect your credit history.

Elissa

Elissa Suh

Published April 29, 2019

When it comes to loan debt, you may have heard the terms paid in full or settled in full. Though related, these terms are not interchangeable. Both refer to accounts which have been closed, meaning the loan term is over and the balance accounted for, but they have very different meanings and implications on your credit history.

If you’ve paid in full, then you’ve paid off the entire balance and interest, while settled in full means you’ve paid less than entire loan amount, usually with negative consequences.

In this article:

What is paid in full?

Paid in full means that you have completed all of your loan payments, including both the principal balance and any interest that has accrued.

If you have never missed a payment, then your account has been paid in full in good standing, which will remain on your credit report for ten years. However any missed payments will be noted on your record for seven years from the original date of delinquency.

What is settled in full?

Settling a debt like a loan in full means that you have negotiated with the lender to pay less than the total owed amount. An account that has been settled in full has been paid for less than the entire balance.

The settlement process comes with serious consequences, including a drop in your credit score, and you’ll carry the mark of “settled in full” or “paid as settled” on your credit report for seven years.

You may feel relieved after settling a loan debt, since you no longer have to make payments you can’t afford. However, because the IRS considers forgiven debt to be a source of income, your settled loan might come back to haunt you as a tax burden.

How to settle a loan debt

Typically only unsecured debt, like personal loans or credit card debt, can be settled. Unsecured loans are based on financial history, like your credit rating. In certain circumstances, such as when you’re in default, it is possible to settle student loan debt.

Alternatively, secured debt like mortgages and auto loans are based on collateral, or seizable assets. If you don’t make payments, the lender can take your home or repossess your car, which is why you usually do not have the option to settle a secured loan.

When to settle loan debt

Usually at least 90 days must have passed since your last required payment to begin the loan settlement process. The lender wants to know that you truly cannot afford to make payments.

You can try to negotiate with them directly. You can also use a lawyer or a debt settlement company, but only as a last resort, which we'll get into later.

Ideally before the bill is sent to collections, you'll figure out a payment arrangement — you might make one large payment or a series of smaller ones in exchange for debt forgiveness. Be sure to get the terms of the arrangement in writing as a safeguard against any future collections.

Debt settlement company

Debt settlement companies also exist to negotiate on your behalf, but beware of their services. Because they will charge steep costly fees — sometimes as high as 25% of the final settlement — settlement companies should only be used as a last resort. The process can also take years, which means months of missed payments that will negatively impact your credit score.

Alternatives to loan settlement

Settling a loan, especially by using a debt settlement company, comes with many financial consequences that can affect you for years. Here are some alternatives to consider instead.

  • Renegotiate with your lender. If you have a secured loan you can try to renegotiate the terms with your lender.

  • Forbearance. You can postpone or reduce your loan payments for a few months or even longer than a year with forbearance.

  • Nonprofit credit counselor. Look for services accredited with either the National Foundation for Credit Counseling (NFCC) or Financial Counseling Association of America (FCAA). Nonprofit counselors can help find financial solutions and create a debt management plan. They often have free sessions as well.

  • Debt consolidation. If you have credit card debt from multiple creditors, you can combine your payments into one under a debt consolidation plan. This will potentially give you one lower interest payment.

  • Student loan forgiveness. In certain circumstances, if you can no longer pay your loan due to your job your student loan may be forgiven, or discharged in the case of permanent disability.

  • Bankruptcy. Though not ideal, with a Chapter 7 bankruptcy, you could keep your property if you have a steady income.