Situations When Loan Restructuring Might Not Be A Good Idea
Repaying a loan, especially when facing a financial crisis, becomes challenging. This is why lenders allow you the option of restructuring your loan.
Restructuring the loan means changing the loan terms to make it easier to repay. Through restructuring, lenders usually extend the repayment tenure, consequently reducing the EMIs. With reduced EMIs, the loan becomes easier to repay, and you do not become a defaulter.
While restructuring is a boon for borrowers facing financial challenges, it is not a good idea in some situations. Here are 5 such situations when loan restructuring would do more harm than good:
- When you have existing low-interest generating savings
Restructuring results in a higher interest outgo as you keep on paying interest over an increased tenure. When you have savings whose interest income is lower than the interest expense that you have to pay, it is better to liquidate such savings to pay off the loan.
For example, say you have a deposit that pays Rs.5000 as interest income every year. With restructuring, say the loan interest increases by Rs.8000/year. In such cases, the interest payable on the loan is higher than the interest earned from the deposit. You can, thus, use the deposit to pay off the loan. This would be cost-effective as it would help you save Rs.3000/year.
- When you want to maintain your credit score
Restructuring adversely affects your credit score. If the loan is restructured, the same is reported to the credit bureau. The credit bureau marks the loan as ‘restructured,’ which hampers the overall score. In the future, if another lender checks your credit report, the ‘restructured’ comment might act as a deterrent. So, if you want to maintain your score, restructuring would not be a good idea.
- When retirement is near
Restructuring the loan near your retirement age is a bad idea as it increases the repayment tenure. If you would be retiring soon, the increased repayment tenure might prove challenging since your source of income would be limited after you retire.
- When there are other loan options available
Restructuring increases the interest outgo and proves expensive. So, if there are other cost-effective loan options, i.e., loans with lower interest rates, you can opt for such loans to repay the existing loan.
Personal loan interest rates are affordable. You can, thus, avail of a personal loan to repay an existing loan. Use the personal loan EMI calculator to find the prospective EMIs to ensure that the new loan is affordable.
- When you would need another loan in a few years
If you might need another loan within a few years, restructuring might be a problem. Firstly, it would impact your credit score, and future lenders might not approve your loan application. Secondly, if your current loan continues, the eligibility to avail of another loan reduces, and you might not get the funds that you need.
Restructuring is a major change in your loan account. You should be careful when you opt for restructuring. It involves an increase in the repayment tenure, which inadvertently increases the interest payable for the loan. So, weigh in the decision to restructure the loan. In the aforementioned situations, restructuring might not be feasible. In such cases, you can opt for a personal loan to pay off the loan that is proving difficult to pay. You can get the funds needed for repayment and avoid restructuring.
So, be careful and decide on restructuring after weighing in all its pros and cons.