Refinancing and Restructuring – What’s the Difference?

Both the term “refinancing” and “restructuring” is pretty familiar to those who have already acquired a loan. These concepts relate to credit management tools, namely, they make it easier to deposit reduced loan amounts or on an increased duration of time. 

What is loan refinancing?

Refinancing usually suggests repayment of debt on loan by issuing a new one. That being the case, the existing loan agreement gets entirely closed, and a similar positive mark is made in history. Fresh loans close old debt, so the operation is generally called refinancing. 

While refinancing loans, the applicant can contact the organization where the previous loan was issued. Also, they have the option to contact a new bank, which will transfer the amount to the client’s account to pay off the previous loan.

When to refinance?

• It allows you to close one or several loans or credit card debts at once by effectively planning the payment schedule and reducing the debt burden.
• A new loan is released as a target loan for specific purposes. In addition, loans that are not closed in time are practically not refinanced anywhere, and a delay will deprive you of the chance to change conditions.
• Updated loan requirements are usually more profitable for the borrower. The rate and size of the monthly payment are reduced, and the schedule turns much more convenient. One can also take loans against bank fds; for example you can take loan against an FD in sbi. But make sure to check the SBI FD interest rate before opening an FD, in case you don’t have one.

Advice: As a responsible individual, you must carefully read and compare different offers of the organizations, as the bank may include additional clauses in the agreement concerning a temporary rate increase or lending remuneration.

What is called restructuring?

Restructuring indicates changing the terms of an existing loan. The loan agreement continues to operate, and all the problems are resolved in the company that released it. You cannot contact some other bank. Such programs aim to improve the financial position of a borrower who is facing challenges with the repayment of the loan. It can worsen the credit history, and a negative mark may appear in it. 

Restructuring is performed according to one of the options: 

• Minimize the interest rate: the debtor will need to spend less on loan repayment every month.
• Increase the loan term – it increases, but the required amount of monthly payment gets reduced.
• Provide the borrower with a credit vacation – a few times; only interest can be paid on loan.
• Write off the accrued interest, and so on.

Important: The loan term does not basically become better – for the debtor, it just provides an opportunity to “get a break”. This helps in preventing a challenging situation and not spoiling the creditor relationship. Most often, banks agree to loan restructuring to not burden themselves with bad debts, not to resort to the collectors’ services, and receive their money without forced collection and the sale of the collateral.

Refinancing vs. Restructuring

At the time of refinancing, the borrower is searching for a more comfortable payment condition for himself. For putting things in order – that is, he gets more than he had. The advantages lie in various preferences – the costs of loan servicing get reduced, several loans get combined into one, it is easier for the client to keep track of the debt. The borrower has the right to select banks, compare their offers and be in a less dependent position.

Most often, the client and the creditor are involved in restructuring involuntarily. Such a thing is an undesirable measure, which is usually used in case of force majeure, deterioration of a person’s material condition. Also, this is the bank’s right – to meet the borrower halfway or not. Therefore, in such cases, the circumstances are more beneficial to the banking institution. 

In short: The borrower would like to be involved in refinancing so that his loan becomes much more profitable and debts are restructured in order to get out of a difficult situation with the minimum losses.

When is it profitable to refinance a loan?

It is always profitable to be involved in refinancing when the borrower continually repays the loan. However, external conditions can change anytime – for instance, the rate of the RBI is updated, or some institution is holding action with “pleasant” offers, attracting clients. 

Of course, the debtor’s request alone is not enough to refinance the obligation. The banking institution studies an existing or potential client, compares his loan burden with income, and estimates his credit history.  Whenever refinancing in a third-party company, the current lender may include a fine, and collect a penalty for early repayment of the loan. Moreover, there is a risk involved in repeating payment of bank commissions, the requirement to secure a loan. However, in general, refinancing is advantageous to the borrower in multiple cases.

1. If the loan’s initial terms are no longer pleasing or the market is offering more interesting offers.
2. If you are required to maintain a positive credit history, the situation has turned more complicated as well as there is a chance of delinquencies and non-payment.
3. If the pledger is at the initial stage of repayment and cannot deposit a significant part of the loan. In that case, refinancing will turn out to be cheaper for the client while maintaining the advantages.
4. If you want to enjoy the benefits of lower interest rates and minimize overpayment.

When to use restructuring?

Restructuring of loans is possible whenever challenges arise with their repayment, and it becomes difficult to use on-lending – for instance, because of misconduct. Bans usually avoid compromising in order not to lose their money, but the borrower is not always profitable from the agreement.  However, if you were able to handle the situation early, the credit rating would not suffer.

Restructuring is used if:

• In most cases, the monthly payment burden is significant for the client – the bank has holidays, the borrower can easily miss various monthly payments, paying loan interest, or “stretches” the schedule, minimizing monthly payments.
• The borrower has accumulated several delays and fines – by agreeing with a credit institution, he will avoid prosecution, a ban on traveling to foreign countries.
• You are required to change the amount, dates, and payment terms, renew the contract – it’s free if the debt is restructured.