Loan restructuring is one of the most sought-after processes when any private/public company or individual faces a financial crisis and is unable to repay the loan under agreed terms. Through loan restructuring, the lender makes the term of the loan more flexible and affordable for the borrower, allowing them to service the loan and avoid default.
In the current scenario due to the Covid-19 induced pandemic, which led to severe economic disruption, the RBI has announced a one time loan restructuring scheme which allows all lenders to restructure the loans of borrowers who continue to face financial stress.
However, as a borrower, loan restructuring should be your last resort as it increases the total cost of borrowing. Following are the 5 such situations where you should avoid going for loan restructuring.
If you have sufficient funds left with yourself or an adequate income source, then it is not advisable to go for loan restructuring. In the loan restructuring process, the repayment tenure is extended by the lender to lower the EMI amount, thus making you pay a lot more because of the snowballing effect of interest dues.
Even also, restructuring a loan will need to be reported by your lender to the credit bureau, and this loan account will show as “Restructured” in your credit report, which could negatively impact your credit profile. Your account will go through greater scrutiny if you have any requirement of a loan in the future for verifying your repayment capability.
Therefore, if you have surplus funds and don’t require it in the near future or a source of income to meet all your financial obligations, use it to repay the outstanding amount.
Draw a proper repayment plan considering all your current as well as future income and expenses so that you can service the loan properly. Go through all the loan restructuring options and choose wisely, only if you can fulfil the new repayment plan.
In case of a default on the restructured loan, it will have serious implications on your finances and credit profile.
Restructuring means increased loan repayment burden as compared to the original term. You have to repay a higher sum of money due to the extended loan tenure or conversion of outstanding interest into a separate credit facility.
Therefore, if you’re close to your retirement age, going for a loan restructuring option can affect your finances and retirement plans as well. It is better to avoid loan restructuring if the repayment tenure goes beyond the date of retirement. You may face liquidity issues or difficulty in meeting the new repayment obligations.
Before considering the loan restructuring option, you can explore other options such as personal loan balance transfer or taking a loan against your fixed deposits or other assets that offer a lower interest rate to pay off the high-interest rate loan.
A personal loan balance transfer is one of the best ways to lower interest cost and increase repayment tenure without affecting the credit profile. You can also plan your EMIs using a personal loan EMI calculator or personal loan balance transfer calculator. It makes your EMIs more manageable and can negotiate a better deal with the lender through this refinancing option.
The benefits of loan restructuring come at a huge cost and can disturb your other long term financial goals. For example, by extending your loan repayment tenure or taking a new credit facility for outstanding interest costs, you are putting your long term goals such as retirement planning, children’s education funds at risk. You may end up downsizing the health insurance or contribution to an emergency fund. It will not only put your financial goals at stake but will also increase the financial risks.
Loan restructuring is not for everyone and is to restore financial health and stability to those who are facing genuine cash flow issues, and have absolutely no other choice (reducing expenses, selling or mortgaging assets, etc). It is best advised to avoid loan restructuring and continue repaying your monthly EMIs, even if it means delaying on some immediate short term plans or cutting down some expenses.
The interest saved on repaying the loan as per the original schedule will be much higher than the returns from your investment assets. Restructuring loans makes little financial sense due to the increased interest burden. Also, everyone is not eligible for the loan restructuring plan, and its approval depends on a lot on the lender’s discretion.
So, if you opt for the loan recast option- evaluate all the factors and calculate the real impact on your finances before moving forward.