Know the Difference: Loan Restructuring Versus Loan Refinancing

A loan restructuring scheme refers to a method where the borrower and lender arrive at an agreement to modify the terms of an ongoing loan.

This method is often used by businesses, individuals, and even governments to avoid defaulting on current debts by negotiating reduced interest rates, extending the repayment timeline, or changing the loan type.

Overall, the purpose of loan restructuring is to arrive at a mutually satisfactory solution between the borrower and lender.

Ideally, a borrower is required to inform a lender beforehand in case they do not witness the possibility of repaying a loan within the agreed timeline or if they feel their financial position has changed.

Often, banks are willing to restructure loans provided it can aid them in recovering their loans, or they trust the intent and capability of a borrower. However, if a borrower files for bankruptcy, a lender cannot recover the loan amount.

In such a scenario, most creditors tend to be more than willing to negotiate with borrowers who are not in a position to repay their loans.

On the other hand, loan refinancing, as the name suggests, refers to the process of applying for an all-new loan with considerably more suitable repayment terms as compared to the existing loan.

This way, the new loan is then utilised to settle the existing loan. Sometimes, borrowers look for loan refinancing schemes when they realise they need better payment terms and more flexible repayment options to address their present financial liabilities.

As compared to loan restructuring, loan refinancing is a relatively simpler process.

Loan refinancing aids in having an enhanced financial benefit concerning interest rates, having a longer repayment tenure, borrowing an additional amount, and reducing the loan cost.

An individual can go in for loan restructuring in a situation where they are facing financial difficulties, which could be due to reduced income or inability to address loan obligations. At the same time, loan refinancing can be considered when an individual wants to gain from better loan terms, such as lower interest rates or extended repayment periods.