What is loan restructuring?

Loans help in meeting huge expenses. Timely repayment of a loan is necessary to prevent any negative impact on one’s credit score. When facing challenges with repayment, loan borrowers can find loan restructuring a beneficial option. Banks and financial institutions allow borrowers to restructure their loan terms to clear the dues and improve their recovery.

See also: What is home loan top-up?

 

What is loan restructuring?

Loan restructuring refers to the process of negotiating the loan terms to prevent any default on current debts. This can be done through:

• Reducing the loan EMIs
• Extending the loan repayment tenure
• Changing the interest rate

Loan restructuring helps lenders to recover the loan amounts.

 

Reasons for loan restructuring

Financial difficulties

Borrowers may face difficulties repaying their loans due to unforeseen scenarios, such as economic downturns or job loss. Loan restructuring enables them to reduce monthly instalments or extend their loan tenure.

Change in financial situation

Borrowers may opt for loan restructuring to get the advantage of lower interest rates or better repayment terms.

Debt consolidation

Borrowers with multiple loans with different interest rates and repayment terms can find loan restructuring beneficial as it allows them to consolidate their debts into a single loan and a lower interest rate.

Business expansion

Businesses seek additional funds to expand their operations. Through loan restructuring, they can modify existing loan terms or secure additional financing.

Property buying

Several borrowers opt for loan restructuring to finance property purchases.

 

Types of loan restructuring

Extension of loan tenure

This type of loan restructuring enables borrowers to extend their repayment period and reduce their monthly obligations.

Reduction in interest rate

Reducing the interest rate on loans helps borrowers to lower their monthly EMIs, which eases their repayment obligation.

Moratorium

A moratorium refers to a mandate by the Reserve Bank of India (RBI), offering a temporary suspension of loan repayments. During this period, loan borrowers are not required to make any payments towards the principal or interest.

Combination of approaches

In certain cases, lenders may agree to a combination of loan restructuring to meet the borrower’s financial needs.

 

Eligibility of loan restructuring

• Financial hardship: Borrowers facing financial hardship due to loss of employment or natural disasters can apply for loan restructuring by providing relevant documents.
• Credit history: Borrowers with a good credit score and credit history have higher chances of getting loan restructuring. Lending institutions consider the borrower’s ability to repay the restructured loan based on their creditworthiness.

• Timely repayment history: Borrowers with a good repayment track record can improve their chances for loan restructuring. Lenders will take into account factors, such as the number of missed payments, late payments or defaults.

• Loan amount and tenure: Lenders are more likely to consider higher outstanding amounts and longer tenures for restructuring.
• Type of loan: Lenders consider home loans, personal loans and business loans for restructuring compared to credit card debt or education loans.

 

Documents required for loan restructuring

• Loan application form requesting for loan restructuring
• Valid identity and address proof, such as Aadhaar or PAN card
• Income proof, such as income tax returns, latest salary slips and audited financial statements
• Recent bank statements as proof of financial transactions
• Original loan agreement
• Letter explaining financial difficulties as a reason for loan restructuring
• Property-related documents
• Employment proof

 

How to opt for loan restructuring?

• Research about various loan restructuring options and their implications
• Maintain transparent communication with the lender, explaining your financial challenges
• Know the eligibility for loan restructuring
• Gather all the required documentation for loan restructuring
• Adhere to the regular payment schedule as per the contract

 

Loan restructuring: Pros and cons

Pros	Cons
Lower monthly EMIs	Extended loan tenure
Immediate financial relief	Long-term costs
Prevents loan default	Short-term impact on credit score
Enhanced cash flow	Increased interest payment
Flexibility with customised options	Additional charges

 

FAQs

What is meant by loan restructuring?

Loan restructuring refers to the process by which borrowers can restructure their loan terms to reduce the interest.

Who is eligible for loan restructuring?

Borrowers facing financial difficulties can submit a letter to their lender with supporting documents to opt for loan restructuring. Those with a good credit history or having certain types of loans can opt for loan restructuring.

Will loan restructuring impact tax liabilities?

Loan restructuring may impact tax liabilities. One must consult a financial advisor to make an informed decision.

Are charges applicable on loan restructuring?

A borrower may have to bear processing fees, administrative charges and documentation charges, depending on the lender and their policies.

Does loan restructuring impact credit score?

Restructuring of a loan may have a short-term impact on the credit score. However, one must ensure regular payment of dues to improve their CIBIL score.

Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com