Loan restructuring and loan refinancing are two common strategies that help borrowers take control of their finances, as managing debt is no easy feat. Navigating through multiple loans can be tricky, especially when you encounter terms that can be difficult to understand. While both strategies sound similar, they serve distinct purposes and have varied outcomes. Clarifying the difference between loan refinancing and loan restructuring helps you choose the best option for your financial situation.
Loan refinancing
Loan refinance involves replacing an existing loan with a new one, usually from a different lender. This new loan typically comes with different terms, such as lower interest rates, longer repayment periods, or a different type of loan altogether. Borrowers usually opt for refinancing to secure better terms, reduce monthly payments or access cash by tapping into their home equity.
If you are considering loan refinancing for your Home Loan, you can also opt for options like Axis Bank's Home Loan Balance Transfer. This allows you to transfer your existing high-interest loan to Axis Bank and enjoy competitive interest rates. It even lets you top up the existing amount.
Loan restructuring
Loan restructuring involves modifying the existing terms of a loan to make it more manageable. This type of loan assistance is often used as a last resort. Restructuring could include changing the interest rate, extending the loan tenure or even reducing the principal amount owed. Loan restructuring is typically sought by borrowers who are facing financial difficulties and need temporary relief to avoid defaulting on their loans.
For instance, several banks have offered debt restructuring services to their customers facing financial hardships during COVID-19. Through these schemes, individuals could negotiate with the bank for a manageable debt restructure, making the repayment terms more feasible given their current financial situation.
Loan refinancing vs loan restructuring
| Feature |
Loan refinancing |
Loan restructuring / loan rescheduling |
| Purpose |
It helps you secure a better loan deal |
It helps you ease your repayment burden during financial hardships |
| Existing loan |
It is paid off with the new loan |
The terms are modified on the existing loan |
| New loan |
Yes (with potentially better terms) |
No |
| Lender |
May involve a new lender |
Same lender |
| Interest rate |
Modified terms could get you lower rates |
Not guaranteed, but it can have a potential interest rate cut |
| Loan term |
May be changed (shorter or longer) |
May be extended |
| Credit score impact |
Potential short-term dip, can improve with on-time payments on the new loan |
May be negatively impacted in this case |
| Qualification |
It is generally easier to qualify for |
Qualification might be difficult based on the current financial situation. |
| Process |
Choose a suitable lender offering your required benefits, submit documents, and apply for the loan |
Contact your lender and provide documentation of hardship; you can negotiate the terms |
Also Read: [Unlock savings by refinancing your Personal Loan]
Concluding thoughts
While both options can help you manage debt more effectively, it's essential to weigh the pros and cons of each approach carefully. Refinancing may offer long-term benefits, while the loan restructuring process may provide immediate relief if you are struggling to meet your repayment obligations.
Ultimately, the choice between loan refinance and loan restructuring depends on individual circumstances and financial goals. By understanding the difference between these two approaches and seeking expert guidance, you can confidently navigate your debt journey and make informed decisions to achieve financial stability.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
