When applying for a loan, it’s important to choose terms that align with your financial capacity. However, circumstances may change, and you might find it challenging to repay the loan under the original terms. In such cases, lenders offer the option to restructure your loan for a more manageable repayment plan. This can be particularly beneficial if you’re facing a financial emergency or struggling to meet the current EMI payments.
Loan restructuring involves negotiating with the lender to modify the loan terms, helping you avoid defaults and protect your credit score. Understanding this process ensures a smoother financial experience during tough times.
Meaning of Loan Restructuring
In this process, lenders evaluate your current financial status to change the loan terms. The updated terms of the loan allow them to reduce your EMIs, ensuring reduced risk of default and mutual benefits.
Lenders may increase the tenure, giving you more time to repay the loan with a comfortable amount. If you have a good credit history and a high score, they may also reduce your interest rate, decreasing the overall cost of borrowing.
Steps of Loan Restructuring
This is not as straightforward as applying for a new loan. Since there are some critical factors to evaluate, lenders and borrowers follow a step-by-step process. Here is an overview of how loan restructuring works.
Re-evaluating Your Financial Situation
The first step of this process involves an assessment of your financial situation. For this, you must list your total outstanding debt, monthly expenses, total income, and other financial obligations. Collecting all this information helps you create a budget, allowing you to decide how much you can afford to pay for your EMI.
For this, you must add your total income, including your salary, rental income, interest earned, etc. From the calculated amount, subtract all your obligations. This includes your expenses, insurance premiums, EMIs, medical expenses, children’s school fees, etc.
After the calculations, the final amount you have left is the surplus funds available. You have more debt than total income if the calculated amount is negative. In such cases, applying for a loan restructure is beneficial.
Reach Out to Your Lender
After the assessment and calculation, the next step is to contact your lender to re-evaluate your loan. Here are the different ways lenders could restructure your loan.
- Consolidation
The lender may allow you to combine multiple loans to reduce your total payable interest. Merging these loans will also streamline your payment as you will have to pay only one EMI.
- Refinancing
This involves replacing the existing loan with a new contract with different interest rates and terms.
- Modification
In this option, the lender will change one of your loan terms to make the repayment easy. This may be lowering the interest rate, extending the tenure, or reducing the EMI.
- Temporary Payment Relief
This involves a temporary pause on your repayment, allowing you time to manage your other financial emergencies.
Compare the Terms
Based on your financial standing, you have the option to choose the best course of action for restructuring your loan. You can evaluate these factors and choose an option which offers the maximum relief.
Provide Documentation
While you assess a suitable option, lenders will ask you to provide documentation to support your request. This includes proof of income, credit report, loan contract, and any other document.
Negotiate the Terms
The next step is to negotiate for an updated term that is suitable for both parties. This is to ensure reduced risk of default without the financial institution facing a loss.
Agreement Process
Based on the negotiated terms, the lender presents a restructured contract. Read all the terms and conditions carefully and agree to complete the process.
When Should You Opt for Loan Restructuring
There are certain conditions when you must opt for restructuring instead of adding to your debt. Here are a few situations that you must be aware of:
- The recent loss of employment
- Reduction in salary
- Loss of additional sources of income
- Substantial loss in business
- Unexpected medical emergency
- Insufficient funds for childcare
- Multiple debt obligations
- Poor credit score with late payments
If you are running low on funds but have a good credit score, you can easily apply for a personal loan to arrange the funds. For this, you can visit the nearest bank or visit the website of an online financial marketplace such as Bajaj Markets to browse and compare options.
Choosing a longer tenure can lower your EMIs, but it’s important to understand how tenure affects both interest rates and EMIs. A longer tenure usually means lower EMIs but a higher interest rate, while a shorter tenure gives you lower interest but higher EMIs. Keep this in mind when restructuring your loan.
Apart from that, it is best that you always choose the most comfortable terms. So, if you are searching for a loan on Bajaj Markets, then you should opt for the lowest interest rates to reduce your total liability.