Loan repayment can be tough sometimes especially when you are low on funds and the daily bill payments are piling up.
In this case, you have two options for getting out of the situation- Loan Refinancing or Loan Restructuring.
Both of these processes can be used to recalibrate the loan financing to meet your present scenario and ease you out a bit.
Both of these terms are confused by a lot of people due to the similar sounding terminology, however, the function of both of these processes is different.
In this article, we will discuss Loan Restructuring Vs. Loan Refinancing, comparing both of them and finding what is the benefit of using them.
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What is Loan Restructuring?
Loan Restructuring is a process of changing the term of the existing loan by either changing the loan tenure or interest rate.
The purpose behind loan restructuring is to provide relief to the borrower, who may be dealing with financial difficulties.
Restructuring the loans have benefits for both lender and customer as it gives relief to the customer and saves time and legal proceeding in case of default for the lender.
This process usually involves renegotiating the loan terms with the customer and borrower and both coming to a new conclusion, which is then formulated into a new agreement.
When to Restructure Your Loans?
Now, the question might arise, When to restructure loans?
Well, the answer is simple, When you are too financially burdened you are at the brink of collapse. You may be missing EMIs and your finances are also taking a hit
This type of scenario usually comes when you lose your source of revenue or face huge losses. Either way, your finances will be messed up and you should get the existing loan restructured as per your financial condition.
Benefits of Loan Restructuring
The following are the benefits of loan restructuring-
- In Loan restructuring, the lender extends the tenure or lowers the interest rate to provide ease to the borrower and may offer both to reduce the burden on the individual
- Some bank provides floating-rate loan which changes with the economic condition of the country hence, the lender may offer to convert it into a fixed-interest rate loan
- Defaulting on the loan comes with various problems like lowering your Credit score, collection action, legal action, etc.
- It provides amazing flexibility for the management of debt allowing adjustment of the payment based on the current financial situation
What is Loan Refinancing?
Loan Refinancing is a process in which you retake a loan on the same loan account then it is called Loan refinancing.
Usually, the customer takes this loan to replace the existing terms with a new term with lower interest rates or reduce their repayment amount.
Usually what happens in this type of loan is that your exisiting loan is replaced with a new loan with a greater loan amount and a favorable interest rate.
Since the amount is greater than the existing loan, you’ll get the difference into your account which can be used by you.
Benefits of Loan Refinancing
The following are the benefits of loan refinancing-
- One of the primary benefits of loan refinancing is that you can secure a lower interest rate on the new loan which can help you save a lot
- Lower interest rates result in reduced monthly payments which can provide relief to the payments
- Refinancing can allow the borrower to consolidate other loans into a single loan to make it easy for the borrower to manage
- By making timely repayments, the borrower can improve their credit score over time
Loan Restructuring Vs. Loan Refinancing Comparison
The following are the differences between the Loan Restructuring and Loan Refinancing Comparison-
|Loan Restructuring||Loan Refinancing|
|The aim behind loan restructuring is to modify the terms of existing loans and reduce the financial burden||Loan refinancing aims to replace the existing loan with a new loan which will offer better interest rates and loan term|
|Loan restructuring will harm your credit score especially after you’ve defaulted on your loans||A short-term impact can be seen on your credit score due to an inquiry on the loan refinancing|
|The fees associated with loan restructuring come with some fee||Loan Refinancing typically involves closing costs and other fees|
|Loan restructuring in longer-term will hurt you financially and should be done as a last resort||Loan Refinancing needs a cost-and-benefit analysis before doing so, which will help you better evaluate the loan benefits.|
Most of the loans can be refinanced except car loans, vehicle loans, home loans, etc. Some loans like Secured loans, unsecured loans, student loans, mortgages, and other types of loans can be refinanced.
The fees depend from lender to lender and typically involve closing costs, prepayment penalties, and loan origination fees.
Refinancing of the loan can be done quickly especially if you are refinancing the loan within the same bank however, the time frame varies from bank to bank.
Loan restructuring can take several weeks to be processed as it involves negotiation, background checks, and several meetings between the lender and the borrower to evaluate the condition.
Yes, refinancing can be done several times but make sure you are doing cost and benefit analysis before doing so.