Loan restructuring vs loan refinancing: Know what is the better option and when you should opt for it

Recognising the difference between loan restructuring and loan refinancing can guide you towards selecting the most beneficial option according to your financial needs. Both are viable solutions offered by lenders when borrowers face financial challenges, but their execution and implications are distinctly different.

Defining loan restructuring and refinancing    

Loan restructuring involves altering the terms and conditions of an existing loan without replacing it with a new one, providing relief for borrowers facing financial difficulties. On the other hand, loan refinancing is a process where a new loan is secured to settle an existing one, typically carried out to reduce interest costs or consolidate debt.

When considering refinancing, the lender assesses the borrower's overall credit history. In contrast, for restructuring, the focus lies on the borrower's current financial situation and their capability to repay the modified loan.

Implications and selection between loan restructuring and refinancing

Refinancing can have a positive effect on a borrower's credit score, assuming they make timely payments on the new loan. Conversely, loan restructuring doesn't directly impact a borrower's credit score, but it can prevent further damage that could result from default.

When deciding between the two, borrowers should consider their specific financial needs. Loan restructuring tailors EMIs and strengthens loan-to-value ratios, providing unparalleled security. However, loan refinancing reveals opportunities for optimised interest rates and flexible terms, boosting financial efficiency.

Loan restructuring vs refinancing: What you should choose

For instance, an entrepreneur who has borrowed a substantial sum at a high-interest rate and faces business setbacks could negotiate for an extension on their loan term (restructuring) or find a new lender offering lower interest rates to pay off the existing loan (refinancing).

Fundamentally, loan restructuring modifies the existing loan contract in challenging situations, while refinancing primarily seeks a more affordable deal. Both methods serve as useful financial tools for borrowers, but their suitability will depend on individual circumstances and requirements.