The Covid-19 pandemic has forced many borrowers to opt for the six-month moratorium to avoid any default on loans. Later, the Reserve Bank of India allowed lenders to offer loan restructuring options to their borrowers to help them repay their loans easily. Eligible borrowers are allowed to extend the repayment term to make it easier for them to repay their loans with a reduction in the size of the EMI or to extend the moratorium up to two years, subject to the terms and conditions of the EMI. lender. Here are the things you need to keep in mind to make an informed decision about accepting or rejecting the loan restructuring option.

Impact on credit rating
When the moratorium on loan repayments was announced, it was mentioned that borrowers who opted for it would not experience any degradation in their credit rating. However, in the case of loan restructuring, no such announcement was made. Opting for a loan restructuring can have a direct or indirect impact on your credit score. Loan restructuring may be flagged as “restructured” in your credit history, which may not result in a direct drop in your credit score, but lenders may take a more stringent stance when assessing your ability to pay. repayment if you apply for another loan in the near future.

Having said that, if you are not planning on applying for another loan, you may want to consider going for a loan restructuring. Even if there is a small drop in your credit score due to a restructuring, you will have enough time to gradually restore it with timely repayments over a period of time.

Cost of borrowing
What is the interest rate charged on the loan that you may be considering the restructuring option for? How long is your existing loan? What is the cost of borrowing another loan to pay off your current loan? The answers to these questions can also help you decide whether to accept or avoid a loan restructuring.

If the interest on your existing loan is higher than on another loan product that you can get from banks, you can go for a new loan instead of going for a loan restructuring. For example, suppose your existing loan is a personal loan product in which the bank’s interest rate is 18% per annum and the remaining term is two years. You can also apply for a secured loan at a lower rate and for a longer term to pay off the existing personal loan and save on interest as well as pay lower IMEs to clear your loan.

If you don’t have the option of taking another loan and your loan product is already a low-interest product like a home loan or home loan, you can opt for a loan restructuring for immediate relief. after a thorough evaluation.

Future borrowing capacity
Opting for loan restructuring will extend the term of your loan. This means that your borrowing capacity will be reduced to the extent of the extended term until you cancel the restructured loan. If you have planned a loan in the near future, you may not be able to borrow the amount you want unless your income increases or the loan obligation decreases. As such, go for the restructuring option only when you have a full repayment plan and you are sure that you will not have large financing needs during the extended term of the loan.

Other liquid investments
Check to see if you have low-yielding, non-core investments or dust-collecting assets that you can liquidate to pay off your loan before you go the restructuring route. This could be a good option, especially if the interest rate on your loan is higher than the return you expect on your existing investments. This would help you get out of debt faster so that you can invest again and accumulate the liquidated corpus. That said, due diligence, particularly with regard to penalties for premature liquidation, is essential before finalizing the decision to liquidate any investment to repay the loan without restructuring aid.

Final thoughts
If you do not go for a loan restructuring and you do not pay back the outstanding loan amount, it can lead to default and the same would be reported to the credit bureaus. Later, the lender can take steps to recover the loan amount. The last date to benefit from the loan restructuring option is December 31, 2020. The loan restructuring option can only be used if you have not paid off your IMEs due to job loss or income made necessary by the Covid-19 pandemic. Loan restructuring may be subject to additional fees, and while it may lower your IMEs, you will have to pay more interest due to the increased tenure.

The author is CEO, BankBazaar.com