Through the process of loan restructuring, borrowers can modify the terms of their loans to make repayment more feasible. Knowing how loans are restructured will help you make better decisions when navigating your options, whether you’re having financial difficulties or just want better terms.
What is Loan Restructuring?
Even though loans usually have a set period of repayment, borrowers may find it difficult to repay their loan and the interest rate because of situations like the current pandemic. Under such circumstances, financial institutions, with government assistance, can implement measures that facilitate easier repayment rather than allowing borrowers to fall behind on their payments.
Restructuring a loan or debt simply means changing the terms of an existing loan to help the borrower manage the principal and interest payments that are due. This is not the same as loan refinancing, which we will cover later. Giving borrowers the option to restructure their loans is generally preferred because it prevents the loan from being classified as a non-performing asset (NPA), which reduces bank profits. It also costs less than allowing the defaulter to file for bankruptcy.
How Home Loan Restructuring Works?
Home loan restructuring allows borrowers to customise the terms of their existing loan. This process entails working with your lender to develop a repayment plan that is appropriate for your current financial situation. You and your lender must maintain open lines of communication, discussing viable options and explaining the reasons for your request for restructuring.
Types of Loan Restructuring
- Extension of Loan Tenure: Extending loan terms is a common debt restructuring strategy. Borrowers can significantly reduce and manage their monthly payments by extending the repayment period. Although it alleviates some of the immediate financial burden, borrowers must also consider the long-term costs, which include higher interest rates.
- Interest Rate Modification: When the interest rate changes, it affects the total cost of the loan. Borrowers can choose between fixed and variable interest rates, each of which has its own set of advantages. Variable rates have the potential to save money if market conditions favour lower interest rates, but fixed rates provide stability and consistent monthly payments.
- Principal Repayment Restructuring: Changes in interest rates affect the total cost of the loan. Borrowers can choose between fixed and variable interest rates, each with their own set of benefits. Variable rates can save money if market conditions favour lower interest rates, whereas fixed rates provide stability and consistent monthly payments.
- Combination of Approaches: In some cases, a combination of restructuring techniques may be used to tailor the solution to the individual’s specific financial situation. It is critical that the restructuring is tailored to the borrowers’ specific needs and objectives.
Eligibility Criteria for Home Loan Restructuring
- Financial Hardship: You should provide proof of actual financial hardships that prevent you from repaying debts on time.
- Consistent Repayment Record: Your case for restructuring may be strengthened by a track record of timely repayment.
- Open Communication: It’s critical to keep lines of communication open with your lender and to be upfront about any financial difficulties.
Pros of Loan Restructuring
- Financial Relief: By lowering and simplifying monthly payments, restructuring can offer instant relief.
- Avoiding Default: Restructuring will help you avoid loan default, which can have negative effects on your credit and finances.
- Tailored Solutions: Because of restructuring’s flexibility, you can get solutions that are specifically tailored to your financial circumstances.
Does loan restructuring affect credit scores?
Yes, debt restructuring can lower your credit score. If no other alternatives exist, restructuring should be considered. One-time loan restructuring may not affect credit scores, but this is not guaranteed. If you have no other options, consider loan restructuring as a one-time solution. However, do not attempt to restructure your loan to avoid future difficulties in obtaining loans.
Conclusion
For borrowers experiencing financial difficulties, restructuring a loan to change the terms and make repayments more manageable is a viable option. Before restructuring, consider the long-term implications, including any potential impact on credit scores. Restructuring can help to avoid defaults and provide immediate relief.