Understanding Loan Refinancing and Loan Restructuring in India

A personal loan is always beneficial if you are planning to refinance your loan or restructure it. But what do loan refinancing and loan restructuring mean? Read this article to learn more about these loan types.

Loan refinancing and loan restructuring play crucial roles in managing debt and improving financial stability. Whether you are burdened with high-interest loans or facing difficulties in meeting loan obligations, understanding these concepts can help you make informed decisions to alleviate financial stress. Let’s understand what the terms loan refinancing and loan restructuring mean and what are the key differences between them.

Loan refinancing involves replacing an existing loan with a new loan that offers better terms, such as lower interest rates or extended repayment periods. On the other hand, loan restructuring involves modifying the terms of an existing loan to make it more manageable, often through adjustments in interest rates, repayment schedules, or loan tenure. Let’s learn more about these terms in this blog.

Loan Restructuring
Generally speaking, loan restructuring refers to modifying an existing loan to alter the existing contract terms, like interest rates or repayment duration. Typically, borrowers choose or opt to restructure their loans if they are at risk of defaulting on the loan and find it challenging to pay their EMIs within the stipulated time frame. In other terms, loan restructuring is nothing but the process of:

1. Maximising the tenure of loan repayment

2. Modifying the payment frequency of interest payments

3. Minimising the EMI on the loan

Loan restructuring is mainly done with the objective of making the borrower able to pay off the loan in the given time frame. Restructuring generally occurs in severe conditions when the borrower is almost bankrupt or declared financially unstable and cannot fulfil the loan obligations.

Process of Loan Restructuring

If you are trying to restructure your loan, you must understand what exactly happens during loan restructuring. In this process, the borrower and the lender find ways to negotiate the existing contract terms. They reach a mutual agreement or settlement.

It is recommended that you inform your lender beforehand if you do not see the possibility of repaying your loan within the agreed period or if your financial position has changed. Informing the lender can help tremendously, as your lender may consider your financial situation and make changes to your loan repayment schedule.

Banks are willing to restructure loans if

1. It can help them recover their loans.

2. Banks trust the intent and capability of the borrower.

If the borrower files for bankruptcy, there is no way for the lender to recover the loan amount. Thus, most creditors willingly negotiate with borrowers who are unable to pay their loans and revise their loan terms. For example, they can increase the payment period, not charge late fees, or modify interest payment frequency.

Meaning of Loan Refinancing:

Loan refinancing refers to the application of an all-new loan with more suitable repayment terms than the existing loan. The new loan is then used to settle the existing loan. Often, borrowers consider loan refinancing when they realise they need better payment terms and more flexible repayment options to meet their current financial commitments.

You can apply for a personal loan and use the funds from the new loan to pay off the balance of the existing one. This process is much simpler and easier than loan restructuring.

A borrower’s credit history reflects the previous loan repayment. When borrowers qualify for refinancing, it positively impacts their credit scores. If you wish to apply for loan refinancing, consider KreditBee. It is your one-stop solution for all your financial needs. You can apply for a personal loan with zero collateral, no restriction on fund use, and minimal documentation. The fund is disbursed immediately.

Is Loan Refinancing a Good Idea?

Loan refinancing is chosen for multiple reasons. For example, you may want to decrease the interest rates on existing loans, consolidate your current loans, change or modify the repayment structure, or pay off another loan. Borrowers with a good credit score can benefit from loan refinancing, as they can secure favourable contract terms and attractive interest rates.

Refinancing helps for the following reasons:

1. To have an enhanced financial benefit with respect to interest rates

2. To have a longer repayment tenure

3. To borrow an additional amount

4. To reduce the loan cost

Differences Between Loan Restructuring and Loan Refinancing

When to Choose Loan Restructuring

1. Opt for loan restructuring when you are facing financial difficulties, such as reduced income or inability to meet loan obligations.

2. Loan restructuring can help you can effectively manage your repayments and avoid the risk of default or financial hardship.

3. Loan restructuring may be suitable if you anticipate a temporary financial setback and need short-term relief.

When to Choose Loan Refinancing

1. Consider loan refinancing when you want to take advantage of better loan terms, such as lower interest rates or extended repayment periods.

2. Refinancing can help you reduce your monthly payments, save on interest costs, or consolidate multiple loans into a single, more manageable loan.

3. It is advisable to choose loan refinancing when you have a stable financial situation and qualify for improved loan terms.

Conclusion

Though loan refinancing and loan restructuring may sound the same, they are different, especially in terms of their objectives. Consider both options and make a sound decision based on your financial requirements. Such loans can help you meet financial commitments easily, assuming you are prepared to pay off the final loan as you reach a better financial position.