Loan Restructuring & Loan Refinancing – A Quick Guide

Repaying a loan on time is crucial if you want to have a good credit rating. However, circumstances can sometimes prevent borrowers from being able to repay their loan on time. 

This could be due to an unexpected financial emergency, loss of income, or circumstances beyond one’s control such as the COVID-19 pandemic.

In such cases, lenders usually provide ways to ease the burden on the borrower while still recovering the loan amount. Two such options are loan restructuring and loan refinancing. 

Let us take a closer look at both these options and when one should opt for them.

Loan Refinancing

In case you are unable to repay your loan, you have the option to take a new loan to repay the existing one. 

This option will work only when the new loan comes with better terms such as lower interest rates or lower processing fees, or other more advantageous terms.

Personal loan refinance is beneficial when the existing EMIs are too burdensome and the borrower is unable to pay this amount.

When Should You Opt for Loan Refinancing

You can refinance your loan – be it personal or home, in the following circumstances –

• When your credit score has increased
  • In this case, you will definitely get loans at better terms such as lower interest rates which will be beneficial for you.
• When your income has increased
  • You can take advantage of your new income by opting for a loan with a lower tenure. Not only will this help you pay off the loan faster, you will also save on interest.
• When you are being offered a loan at better terms
  • If a lender offers you a loan with better terms and conditions, you can consider refinancing your existing loan for the new one
  • These terms and conditions should be to your advantage and help reduce your monthly loan burden.
• When you have an asset to pledge
  • Opting for a secure loan will definitely reduce your interest rate which will be highly beneficial
  • Additionally, repaying a secured loan on time will also boost your credit score significantly

What is Loan Restructuring

In case you are unable to repay your loan due to genuine circumstances, the lender may offer to change certain terms and conditions.

This is done with the intention of making the loan repayment more affordable for you.

The lender may offer to increase the repayment term, waive off a certain amount, or even reduce the interest imposed. Apart from this, the lender may offer a moratorium period, or a short period where you do not have to pay your EMIs. 

When Should You Opt for Loan Restructuring

You can contact your lender for loan restructuring options in the following circumstances –

• You have lost your source of income
  • If you have lost your primary or steady source of income and repaying EMIs is challenging, you can try to get your loan restructured. You can also request for a moratorium period to help get your finances back on track.
• Your income has reduced or other unavoidable obligations have arisen
  • In such situations, you can either request for an extension in your tenure or a lowering of interest rate. This way you will still be able to repay your EMIs on time

However, despite the advantages that loan restructuring can provide, your credit score will get affected. Therefore, opt for this only if you have no other choice.

Alternate options include borrowing from a family member or close friend to help pay the EMI or even sell an asset.

In Conclusion

While loans are highly beneficial, repaying them is of utmost importance. Not only will it affect your credit score if you don’t, you will not be able to get a loan in the future.

However, you may not be able to repay your EMI on time due to unavoidable circumstances. In such cases, you can opt to get your loan restructured or refinanced. These options can either help you repay your loan faster and more efficiently, depending on your circumstances.

Have you opted for either of these options? Which one was more beneficial to you? Let us know in the comments below.