The Covid-19 pandemic saw various relief measures being approved by the RBI to ease the financial burdens of individual borrowers. These measures were then implemented by banks and other financial institutions to reach each and every eligible borrower. 

As a result of the financial pressure faced by borrowers, a lot of them had to opt for the six-month moratorium due to repayment default fears. At the end of the six-month EMI moratorium, RBI had instructed lenders to offer a one-time loan restructuring option, to further ease their financial burdens and make it easy for borrowers to repay their loans, during these challenging times.  

Eligible borrowers can opt for an extension of the repayment tenure to ease the burden of loan repayment. This is done by reducing the EMI size or extension of moratorium period up to two years. 

Many borrowers are keen to learn about the impact of loan restructuring on credit scores. In this article, we explain why your credit score does not get impacted by loan restructuring.

Does credit score get impacted due to loan restructuring?

When the option of a moratorium on loan repayment was initially announced, lenders had come out to clarify that the borrowers opting for a moratorium will not face the challenge of credit score downgrade. However, there was no clarification made on loan restructuring and its impact on credit score. 

Loan restructuring may directly or indirectly impact a borrower’s credit score. If it gets reported as “restructured” within the borrower’s credit history, it will not necessarily mean a direct lowering of credit score. However, risk-averse lenders could carefully assess the borrower’s repayment capacity while applying for a fresh loan in the future.

For borrowers who are not planning to go for a fresh loan in the future, it is safe to consider the option of loan restructuring. In case there is a slight impact on credit score due to restructuring, there will be sufficient time to gradually move back to a good score by making timely repayments in due course.

Factors to Consider before Opting for Loan Restructuring

While considering a loan restructuring option, always try and ask these important questions:

  1. What is the interest rate charged on the loan which requires restructuring?
  2. What is the total tenure of your present loan? 
  3. What is the cost of borrowing a fresh loan for repaying the current loan? 

Once you can address these questions, you will be able to determine whether to go for loan restructuring.

In case the interest on the current loan is higher than a different loan product offered by other banks, it makes sense to go for a new loan instead of choosing a loan restructuring option. For instance, let’s assume that your existing personal loan has an interest rate of 18% p.a. and the remaining loan tenure is for two years. You can easily go for a secured loan at a lower interest rate and a longer loan tenure for repayment of existing personal loan. This way, you will be able to save on interest and also pay lower EMIs while repaying your loan. 

If you are unable to find a good alternative for a fresh loan and your existing loan product has a low-interest rate, you can choose loan restructuring to gain some immediate financial relief. 

Additional Reading: Is Loan Restructuring Different from Loan Refinancing?

Impact of Loan Restructuring on Future Loans

Once you opt for loan restructuring, you have to be prepared for a stretch in your loan tenure. This will have an impact on your borrowing capacity as it may get tightened throughout your extended loan tenure, till the time you clear all the dues of the restructured loan. 

If you have plans to borrow in the near future, you may be unable to take out the desired amount unless your income has risen significantly or in case the loan obligation is lowered. Therefore, choose the restructuring option once you have a thorough repayment plan in place and you are sure that there will be no major financing requirement throughout the loan tenure.

Alternative to Restructuring: Consider Liquidating an Investment/Asset

Verify if there are any low-return generating investments or assets which are non-essential and are not being utilised presently. You can liquidate these to repay your loan instead of opting for loan restructuring. This can work out as a good alternative, especially if the interest rate on your loan is higher as compared to the return expected from existing investments. This way, you can become debt-free faster and invest once again to accumulate your savings. 

It is important to ensure proper due diligence, especially with regards to penalties on premature liquidation of investments. Before liquidating any investment for repaying the loan and avoiding loan restructuring, always verify the fees involved.

Logistics of One-time Loan Restructuring 

The last date for availing loan restructuring option is December 31, 2020. It can be availed by those who are struggling to repay loan EMIs as a result of the loss of a job or reduced income due to Covid-19 pandemic. Loan restructuring is often subject to additional fees, and while it may help in lowering your EMIs, you could end up paying more interest because of the increased tenure.

If you don’t choose loan restructuring and delay repayment of the outstanding loan amount, it could result in default. This will be reported to the credit agencies and lenders could initiate steps for loan recovery. 

Bottom Line

Due to the circumstances brought about by the ongoing pandemic, the financial situation of many borrowers has been impacted. It has necessitated many to opt for loan restructuring. While this comes as a boon, there could be an impact on many other factors. However, loan borrowers must be aware of the fact that RBI and lenders have clarified that there won't be any impact of loan restructuring on credit score. This will surely come as a respite to many who would have otherwise been worried about the consequences of loan restructuring.