Loan Restructuring Vs Loan Refinancing

Loan/Debt Restructuring and Loan/Debt Refinancing are two different processes but are used in a quite similar situation and both have their complications and affect on the credit score. Let’s have a look at both of these methods. Loan Restructuring Vs Loan Refinancing

Loan Restructuring :

Debt restructuring is the process of making changes to the existing contract. This process is used by borrowers when they are on the verge of becoming defaulters. This method involves increasing the tenure of the loan repayment and reducing the EMIs so that the loan repayment becomes easier for the borrower. Debt restructuring is usually used when the financial stability of the buyer is at terrible risk. 

In this process, The borrower and the lender go through a negotiation regarding the loan. The borrower tells about the situation faced by him/her upon which the financing agency or the bank reacts and when they reach a common ground, The debt restructuring is done.

Impact on Credit Score :

Debt restructuring has a negative effect on the credit score of the borrower. As per the RBI guidelines, One-time debt restructuring does not affect the credit score during the covid19 pandemic but was only limited till the end of 2020. If it is not very urgent then should avoid getting your loan restructured.

Loan Refinancing :

Debt refinancing is in which a borrower applies for a newer loan with better offers and this loan is also used to fulfill the obligations of the pre-existing loan. It can be done for better interest rates, repayment tenure, or better amounts. Debt refinancing is a quick process and also has no negative impacts on the credit score. It can even help you in getting a better credit score. This process is very helpful for borrowers facing problems with financial stability and also the ones who need more funds for growth or any other purpose.

Differences Between Loan Refinancing and Loan Restructuring :

• Debt restructuring is the process of doing changes in the pre-existing loan whereas debt refinancing is the process of transferring the pre-existing loan from one lender to another.
• The prime objective of debt restructuring is to avoid loan defaults whereas debt refinancing is used to get better output from interest rates and repayment tenure.
• Debt restructuring has a negative effect on the credit score but debt refinancing has only temporary effects which are easy to overcome and positively affect the credit score in the longer run.

Both these processes have their own pros and cons. Bankruptcy can be avoided with the help of both of these processes but debt restructuring is only available in the only case of emergency. If you are looking forward to using any of these methods then properly check your financial stability and the plans you have related to the funds. These methods can be very helpful for your growth and you should introspect about your situation before using either of them. Make sure that you see aware of the positive and negative effects of both these methods before choosing any of these methods. Loan Restructuring Vs Loan Refinancing