Overview
Despite the fact that loan restructuring and refinancing sound identical, they are two distinct processes that are often confused. By clarifying the similarities and discrepancies between these two processes in this article so you can make the best loan decision possible. Let’s start with a look at how loan restructuring and refinancing work.
What is loan restructuring?
In general, restructuring is the method of modifying an existing loan to adjust the terms of the contract. Borrowers usually prefer loan restructuring when they are at risk of defaulting on their loans and find it exceedingly difficult to make timely payments.
Restructuring is often used when creditors are on the verge of bankruptcy or are considered financially vulnerable and unable to fulfill their remaining loan obligations. When borrowers are on the verge of defaulting, personal loan balance transfer becomes a more desperate choice. When negotiating a modification to an existing loan contract is the only way to prevent loan defaults, this option is chosen.
Can loan restructuring affect credit scores?
Yes, reorganizing your debt has a negative effect on your credit score. As a result, restructuring should only be seen as a last resort if no other alternatives are open. One-time loan restructuring, on the other hand, has no effect on credit scores. Due to the pandemic, the RBI declared a one-time restructuring gain for both personal and corporate loans. This measure aims to provide financial assistance to the millions of Indians who have been affected financially as a result of the pandemic. Borrowers and lenders will be relieved because the restructuring process will take place without these accounts being classified as non-performing assets.
What happens in loan restructuring?
Loan restructuring occurs when a lender and a borrower negotiate the terms of an existing loan arrangement and reach an agreement. If you are unable to repay your loans on time, or if a layoff has put your financial security at risk, you can notify your lender. Giving your lender advance notice can be beneficial, as they may be sympathetic to your financial condition and provide you with some relief.
The last thing any lender wants is for their borrowers to default on their loans. Lenders claim that recovering the loan expense is preferable to the borrower declaring bankruptcy, which would result in the lender losing the loan sum. As a result, most creditors are willing to work with underwater borrowers to restructure loan terms, such as extending the payment duration, waiving late fees, minimal personal loan documents or changing the pace of interest payments.
How to apply for a personal loan?
Applying for a new loan or loan instrument that has better terms than the previous one and can be used to pay off the previous loan commitments is known as loan refinancing. Borrowers typically choose loan refinancing when they find better loan terms elsewhere.
Applying for a new, comparatively cheaper loan and using the proceeds to pay off the balance on an existing loan is an example of personal loan balance transfer. Personal loan balance transfer is a faster process than restructuring because refinancing is easier to apply for and has a favorable effect on credit ratings because the initial debt would appear as paid off on the payment history.
Wrapping Up
While debt restructuring and refinancing may sound similar, they are two distinct processes with distinct goals. Make sure you understand the nuances between the two by learning more at Finserv MARKETS, so you can choose the best choice for your budget.
