What is loan restructuring and what are its benefits?

Numerous financial issues were brought on by the COVID-19 pandemic. In the past two years, an alarming number of people have lost jobs, and an even greater number have become indebted. Businesses closed unexpectedly, affecting hundreds of workers. As a result, revenue stopped growing but expenses kept rising sharply. If you want to know about what is loan restructuring and its benefits this blog is for you.

What is loan restructuring?

Even though most loans have a set repayment time, circumstances like the present epidemic may make it challenging for borrowers to pay back their loans and the interest. Financial organizations can make changes that make repayments simpler with the help of the government, as opposed to enabling borrowers to default on their payments.

Additionally, loan restructuring refers to changes to the conditions of the loan that make it simpler for the borrower to manage the repayment of the principal and interest on the loan. Debt and loan refinancing, which we will cover more, should not confound. Since it prevents the debt from being classified as a non-performing asset (NPA), which has an impact on the bank’s profitability, loan restructuring is frequently preferred. It also costs less than allowing the defaulter to file for bankruptcy.

A one-time debt restructuring was made available in the most recent RBI circular on loan restructuring to assist borrowers who face financial difficulties. In August, when the six-month embargo period came to an end, the RBI permitted a single loan modification. According to the RBI, personal loans and standard loan accounts that have not fallen behind for more than 30 days as of March 1, 2020, would be taken into account for loan restructuring.

Benefits

There are multiple benefits of loan restructuring. Some of the benefits of loan restructuring are as follows:

Improved Cash Flow

Loan restructuring can alleviate immediate financial stress by reducing the monthly repayment amount. Moreover, this allows the borrower to manage their cash flow more effectively and meet other financial obligations.

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Avoidance of Default

By restructuring the loan, the borrower can avoid defaulting on their payments, which can have severe consequences such as damage to credit scores, additional fees, and legal actions from the lender.

Increased Repayment Ability

Loan restructuring provides an opportunity for borrowers to regain financial stability and improve their repayment capacity. Additionally, with more manageable terms, they can work towards meeting their obligations and gradually improve their financial situation.

Preservation of Collateral

In cases where the loan is secured by collateral (such as property or assets), loan restructuring can help protect the borrower’s assets from being seized or foreclosed upon by the lender.

Continued Relationship with Lender

Restructuring the loan demonstrates the borrower’s commitment to fulfilling their obligations. Moreover, it can help maintain a positive relationship with the lender, potentially facilitating future borrowing opportunities.

Types of Loan Restructuring Programs

There are various types of loan restructuring programs that may be available depending on the country, financial institution, and specific circumstances. Here are some common types of loan restructuring programs:

Loan Modification

This involves making changes to the terms of an existing loan to make it more affordable for the borrower. Moreover, modifications may include reducing the interest rate, extending the loan term, or adjusting the monthly payment amount.

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Forbearance Agreement

In a forbearance agreement, the lender allows the borrower to temporarily reduce or suspend loan payments for a specific period. This is often used during times of financial hardship or emergencies.

Refinancing

Refinancing involves replacing an existing loan with a new loan that has different terms. Borrowers may refinance to obtain a lower interest rate, extend the loan term, or change from an adjustable-rate mortgage to a fixed-rate mortgage, among other reasons.

Debt Consolidation

This program combines multiple debts, such as credit card debts or personal loans, into a single loan with a lower interest rate or longer repayment term. It aims to simplify repayment and reduce the overall cost of borrowing.

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Short Sale

In cases where a borrower is unable to continue making mortgage payments, a short sale may be an option. The lender approves the property being sold for less than the balance of the outstanding mortgage. Moreover, this helps the borrower avoid foreclosure and mitigates the lender’s losses.

Loan Rehabilitation

This type of program is typically applicable to student loans. It allows borrowers who are in default to make a series of agreed-upon payments to rehabilitate their loans and bring them back into good standing.