Loan Restructuring vs Loan Refinancing: What’s the Difference?

Are you struggling to make your loan payments? If so, you’re not alone. Millions of people are in debt, and many of them are struggling to make their monthly payments.

There are a few things that you can do to get out of debt, and loan restructuring or refinancing may be one of them.

Many people tend to be confused between both terms which results in not utilizing the benefits which come out of the two.

Loan restructuring is a process of changing the terms of a loan, such as the interest rate, repayment period, or monthly payment amount and Loan refinancing is the process of replacing an existing loan with a new one.

Both of these can be used to improve the borrower’s financing situation and provide him/her relief from the loan burden.

There are various benefits when it comes to loan refinancing or restructuring like Reduced monthly payments, Lower interest rates, Improved credit score, etc.

In this article, we will discuss Loan Restructuring vs Loan Refinancing: What’s the Difference, and what are the benefits?

We will compare both and provide detailed information on what type of debt reform you should choose.  

But first, let’s find out what is Loan restructuring and loan refinancing.

Loan Restructuring

Loan restructuring is a process where the terms of an existing loan are modified to provide a borrower with more favorable repayment payout options.

This can include changing the interest rate, extending the repayment period, or adjusting the payment schedule.

The purpose of loan restructuring is to provide relief to borrowers who are struggling to meet their payment obligations due to financial difficulties.

Loan restructuring can be a beneficial option for both borrowers and lenders. For borrowers, it can provide much-needed relief from financial stress and help them avoid defaulting on their loans.

For lenders, it can help them avoid costly and time-consuming legal proceedings associated with loan defaults if the borrower fails to repay.

The process of loan restructuring typically involves negotiations between the borrower and lender to reach an agreement on the new terms of the loan.

In some cases, a third-party mediator may be involved to help facilitate these negotiations. Once an agreement is reached, the borrower and lender must adhere to the new repayment terms.

Benefits of Loan Restructuring

The following are the benefits of loan Restructuring-

• Loan restructuring may involve extending the repayment period or adjusting the payment schedule, which can result in lower monthly payments helping borrowers ease their repayment
• Loan restructuring may involve converting a variable-rate loan to a fixed-rate loan, which can provide greater stability and reduce the total amount of interest paid over the life of the loan
• Loan restructuring can help borrowers avoid defaulting on their loans, which can have serious consequences, such as damage to credit score, collection actions, and legal action
• Loan restructuring can provide borrowers with greater flexibility in managing their debt, allowing them to adjust their payments based on their current financial situation

Loan Refinancing

Loan refinancing is a process where a borrower takes out a new loan to pay off an existing loan. The terms and interest rates offered in the refinancing are better than the existing ones.

The main aim behind this is to reduce the overall cost of the loan by subscribing to a lower interest rate or extending the repayment period and reducing the monthly repayment amount. There are several reasons why a borrower may choose to refinance their loan.

For example, if interest rates have decreased since the original loan was taken out, refinancing can provide an opportunity to secure a lower interest rate and reduce monthly payments.

Similarly, if a borrower’s credit score has improved since the original loan was taken out, they may be able to qualify for a lower interest rate on a refinanced loan.

The process of loan refinancing involves applying for a new loan with a lender, which will involve checking your credit and an evaluation of the borrower’s financial situation.

The lender will then offer new loan terms, including the interest rate and repayment period. If the borrower accepts the new terms, the lender will use the funds from the new loan to pay off the existing loan, and the borrower will begin making payments on the new loan.

If there is a difference in the amount then it will be transferred to the borrower and that amount can be used by him/her as per their use.

Benefits of Loan Refinancing

The following are the benefits of loan Refinancing-

• One of the primary benefits of loan refinancing is the ability to secure a lower interest rate on the new loan, which can result in significant savings
• Lower interest rates can also result in reduced monthly payments, which can provide relief to borrowers
• Refinancing can also allow borrowers to consolidate multiple loans or debts into a single loan, which can simplify the repayment process
• By making timely payments on the new loan, borrowers can potentially improve their credit score over time,

Loan Refinancing vs Loan Restructuring: Comparison

The following is a detailed comparison between Loan Refinancing and Loan Restructuring-

Loan Restructuring	Loan Refinancing
The purpose of the loan is to modify the terms of an existing loan to provide relief to borrowers who are struggling to meet their payment obligations	The purpose of the loan is to replace an existing loan with a new loan with better terms and interest rates, to reduce the overall cost of the loan
Loan restructuring may be reported as a modification to the loan and could have an impact on the borrower’s credit score negatively	Loan refinancing typically requires a credit check and could have a short-term impact on the borrower’s credit score but improves credit score in the long term
The fees associated with loan restructuring typically come with some fees which are lower than the loan refinancing.	Loan refinancing typically involves closing costs and other fees
Borrowers may be eligible for loan restructuring if they are experiencing financial difficulties or are at risk of defaulting on their loan.	Borrowers may be eligible for loan refinancing if they have good credit, stable income, and a history of making timely payments on their existing loan.
Loan restructuring may not provide as much long-term financial benefit as loan refinancing, and could potentially lead to a higher total cost of the loan.	Loan refinancing can lead to a higher total cost of the loan if the borrower does not carefully consider the costs and benefits of refinancing.

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