Borrowers may look for ways to make their loan repayments more manageable when their financial situation changes. Two terms that often come up are loan restructuring and loan refinancing. Although both can change the way a borrower manages an existing loan, they work differently.
Loan restructuring generally involves changing the terms of an existing loan with the same lender. Refinancing usually involves replacing an existing loan with a new loan, often from another lender, on different terms.
Understanding the difference can help borrowers identify which option applies to their situation.
What Is Loan Restructuring?
Loan restructuring is a process in which the existing lender modifies certain terms of a loan to make repayment more manageable for the borrower.
Depending on the lender, restructuring may involve changes such as:
- Extending the loan tenure
- Reducing the EMI for a period
- Changing the repayment schedule
- Providing a temporary repayment arrangement
- Consolidating certain overdue amounts into the repayment plan
- Modifying other loan terms under an approved restructuring arrangement
The borrower generally continues to have the same lender and loan relationship.
Restructuring is commonly considered when a borrower faces temporary or sustained financial difficulties and may have difficulty following the original repayment schedule.
What Is Loan Refinancing?
Loan refinancing means taking a new loan to repay an existing loan. The new loan may be obtained from the same lender or, more commonly, another lender offering different terms.
For example, suppose a borrower has an existing home loan at a relatively high interest rate. If another lender offers a suitable loan at a lower rate, the borrower may consider refinancing. The new loan is used to close the old loan, after which repayments are made under the new loan agreement.
Refinancing may involve changes to:
- Interest rate
- Loan tenure
- EMI
- Repayment structure
- Loan terms and conditions
The borrower must generally meet the new lender’s eligibility and credit assessment requirements.
Loan Restructuring vs Loan Refinancing: Key Differences
| Factor | Loan Restructuring | Loan Refinancing |
| Basic meaning | Changes the terms of an existing loan | Replaces an existing loan with a new loan |
| Lender | Usually the existing lender | Can be the same or a different lender |
| Main purpose | Make repayment manageable when circumstances change | Obtain different loan terms, such as a lower rate |
| New loan application | Generally no completely new loan from another lender | Usually involves a new loan application |
| Credit assessment | Depends on the lender and restructuring arrangement | New lender generally assesses eligibility |
| Interest rate | May or may not change | May change depending on the new loan |
| Tenure | May be extended or otherwise modified | Can be selected or changed under the new loan |
| Charges | Restructuring-related charges may apply | Processing, foreclosure or other applicable charges may apply |
| Typical situation | Financial difficulty or repayment stress | Borrower wants more suitable loan terms |
When Is Loan Restructuring Used?
Loan restructuring is generally relevant when the borrower is facing difficulty maintaining the original repayment schedule.
For example, a borrower may experience:
- Temporary reduction in income
- Business cash-flow problems
- Unexpected financial expenses
- Loss of employment
- Other circumstances affecting repayment capacity
The lender may assess the borrower’s situation and determine whether a restructuring arrangement is available.
Importantly, restructuring is not an automatic right. Approval, terms and eligibility depend on the lender, loan agreement and applicable rules.
When Is Loan Refinancing Used?
Refinancing is generally considered when the borrower believes a new loan could provide more suitable terms.
Common reasons include:
- Lower Interest Rate
A borrower may explore refinancing if another lender offers a lower applicable interest rate. However, the borrower should compare the total cost rather than looking only at the advertised rate.
- Lower EMI
A lower interest rate or longer tenure may reduce the monthly EMI. A longer tenure, however, can increase the total interest paid over the life of the loan.
- Change in Loan Tenure
A borrower may refinance to change the remaining repayment period according to their current financial situation.
- Better Loan Terms
Borrowers may also compare refinancing options when they want different features, charges or repayment conditions.
Does Loan Restructuring Reduce the Loan Amount?
Not necessarily.
Restructuring primarily changes the repayment terms. It does not automatically mean that the principal outstanding is reduced or that interest is waived.
The actual effect depends on the restructuring arrangement approved by the lender.
Borrowers should therefore obtain the revised repayment schedule and understand the total amount payable after restructuring.
Does Refinancing Save Money?
It can, but it is not guaranteed.
A lower interest rate does not automatically mean refinancing will be cheaper. The borrower should consider:
- New interest rate
- Remaining loan tenure
- New EMI
- Processing fees
- Applicable foreclosure or prepayment charges
- Documentation and other costs
- Total interest payable under the new loan
For example, extending the tenure substantially may lower the EMI but increase the overall interest cost.
Impact on Credit Score
Both restructuring and refinancing can have implications for a borrower’s credit profile, depending on how the arrangement is reported and whether repayments are made on time.
A borrower considering restructuring should understand how the proposed arrangement will be reported to credit information companies.
Similarly, applying for refinancing may involve a new credit assessment. Multiple loan applications within a short period can also result in multiple credit enquiries.
The exact impact depends on the circumstances and reporting practices of the relevant lenders and credit information companies.
Can You Refinance a Restructured Loan?
It may be possible, but approval is not guaranteed.
A lender considering a refinancing application will generally assess factors such as:
- Credit history
- Existing repayment record
- Current income
- Outstanding loan amount
- Debt obligations
- Loan-to-value ratio, where applicable
- The lender’s eligibility criteria
A history of financial difficulty or restructuring may affect how a new lender assesses the application.
Which Is Different From Loan Restructuring?
The simplest way to understand the distinction is:
Restructuring changes an existing loan arrangement, while refinancing replaces the existing loan with a new loan.
For instance, if a borrower is struggling with the current EMI and asks the existing lender for a revised repayment arrangement, that is generally restructuring.
If the borrower takes a new loan to close the existing loan and begins repayment under the new agreement, that is refinancing.
Things to Check Before Restructuring or Refinancing
Before choosing either option, borrowers should compare the complete financial impact.
Check:
- Outstanding principal: Find out exactly how much remains.
- Current interest rate: Check whether it is fixed or floating and understand the applicable rate.
- Remaining tenure: A long remaining tenure can significantly affect total interest.
- Revised EMI: Calculate whether the new EMI is actually affordable.
- Total repayment: Compare the total amount payable, not just the monthly EMI.
- Additional charges: Check processing, foreclosure, documentation and other applicable fees.
- Credit reporting: Ask how restructuring or the new loan will be reported.
- Loan conditions: Read the revised or new agreement carefully before accepting it.
Conclusion
Loan restructuring and loan refinancing serve different purposes. Restructuring generally modifies an existing loan to address repayment difficulties or other changes in the borrower’s circumstances, while refinancing replaces an existing loan with a new loan offering different terms.
Restructuring may be relevant when the borrower needs a revised repayment arrangement with the existing lender. Refinancing may be considered when the borrower can qualify for a new loan with terms that better suit their current financial situation.
Before proceeding, compare the EMI, interest rate, total repayment, applicable charges and credit-reporting implications. The option should be assessed based on the borrower’s individual financial circumstances and the terms actually offered by the lender.
