The loan moratorium was initially intended to be a temporary remedy for domestic borrowers to escape personal loan repayment default as a result of the pandemic crisis’ financial difficulties. On the Supreme Court’s order, the moratorium was prolonged for six months until August 31, 2020, and then for another six months until September 28, 2020. The RBI established a debt restructuring option for borrowers who are facing serious financial setbacks as a result of the epidemic, as it appeared that the moratorium could not be prolonged for a longer duration.
Some banks have already announced their restructuring strategies, under which borrowers who are unable to repay their pending EMIs during the moratorium period may be eligible for some form of relief in the form of a deferment in the immediate personal loan repayment requirement in exchange for paying the applicable rate of interest of personal loan and any additional charges incurred during the restructuring period.
Now the question is: if you’re applicable for a loan restructuring plan, should you take it? Will it be beneficial to you? A restructuring plan might be useful in some circumstances where there is no way to organise the repayment dues and the borrower does not want to default on the personal loan. However, there are several circumstances in which debt restructuring may not be the best option. Let’s look at a few scenarios where you should avoid implementing a restructuring strategy and weigh your alternatives.
- When your income is sufficient to repay your loan without the need for restructuring assistance.
It is not recommended to choose the loan restructuring option if you have sufficient funds to repay the existing personal loan amount. Even if you want to restructure a single loan product, the credit bureau will report it to them as ‘Restructured.’ It means that if you need another loan in the future, there may be issues about your repayment capabilities, which could cause difficulty acquiring a loan.
- If you don’t have a plan to repay the restructured loan.
Restructuring necessitates meticulous repayment planning. If you don’t have a strategy in place, you could end up ruining your entire financial situation. You should be aware of your present income and expenditure, as well as anticipated future income and expenditure, so that you can set aside money to pay off the restructured personal loan. You may end up paying more money in rate of interest of personal loan if you don’t have a repayment plan for the restructured debt, or you may choose the wrong restructuring choice that you won’t be able to fulfil. If you’re serious about choosing the restructuring option, it’s best to be prepared.
- When you’re on the verge of retiring.
Restructuring your loan could increase your debt load and extend your personal loan term into your post-retirement years, when repaying it will be even more difficult. If you’re already unclear about how to build up your target retirement fund, you might want to avoid the restructuring option that extends beyond your retirement year. If you have a debt repayment obligation after you retire, you may run out of money. If you have no choice but to choose for loan restructuring, even if it means working part-time after retirement, seek a part-time post-retirement income alternative to help you cope with the additional financial strain.
- When you can repay at a reduced interest rate by taking up a second loan.
If you’re thinking of restructuring high-interest loan products like credit card debt or unsecured loans, it’s a good idea to look into alternative possibilities first. You can receive a secured loan using your fixed savings or assets, which will likely have a lower interest rate and a longer repayment period. A secured personal loan can help you save money on interest while also giving you more repayment options. So, if you have the option of arranging the essential funds using a less expensive borrowing alternative, avoid loan restructuring.
- When it interferes with your primary financial objectives.
You may want to restructure a loan, but consider what you’re risking by doing so. If restructuring puts other important financial goals at danger, such as your children’s school fund, or if it means reducing your health or life insurance coverage or depleting your emergency fund, you should reconsider your decision.
To summarise, loan restructuring is not the final solution, but rather one of several options accessible to you to address the cash-flow challenges caused by the pandemic. That said, if you believe you must use the restructuring plan, do so only after carefully assessing its effects on your finances, having a repayment plan in place, and exercising a high level of financial discipline to stick to it.
While debt restructuring and refinancing may appear to be the same thing, they are two separate processes with separate purposes. Learn more about the differences between the two by visiting Finserv MARKETS, so you can make the best decision for your budget.