Loan restructuring is a method which enables a sovereign state or an organization, either public or private, facing financial distress and debt flow problems to restructure and reduce its outstanding debts in order to restore or improve liquidity thus enabling it to continue its business operations. In the United States the method has received wide use by a number of financial institutions which have faced problems relating to their financial strength and position. There are a variety of reasons that lead to the need for restructuring of debts including the prolonged loss of investor confidence due to the adverse economic situation. In some cases, bankruptcy may be an option which may be used to restructure commercial or industrial debt portfolios.
In order to understand the concept of loan restructuring, it is essential to first discuss what it is exactly. It is here that a debtor who is facing financial problems will approach a financial institution or other lender with the aim of having a portion of their debts restructuring. In essence, the borrower or the debtor’s creditor will agree to restructure the debt in such a manner as to make it more affordable to the debtor. This involves agreeing on lower interest rates, extending terms of payment, and even waiving charges on late payments. In most cases, the changes will see the debtor pay less to the creditor than they would have paid otherwise.
The borrower or the debtor’s creditor will approach any one of the following five bodies to opt for loan restructuring. First, they will approach either a loss mitigation or credit score agency. If the borrower does not have a good credit score, they will choose to approach a lender that they know will give them the lowest interest rates and the lowest possible monthly repayment sum. This is the primary reason for approaching these organizations. Once this is agreed upon, negotiations can begin.
Borrowers also have the option of opting for a moratorium on repayments. A moratorium is simply a temporary halt on repayments whilst the negotiations take place. This is often used by borrowers who simply do not have the money at the moment to pay off their loan with the given interest rates and in full. If the lender and the borrower agree on a short-term moratorium, this can help to lower the overall repayments by a large amount, depending on the duration and how much the property is worth at that time.
The second option for borrowers opting for loan restructuring involves taking on a new loan term. The duration of the loan borrowing capacity can range from a few months, to almost five years. For some borrowers, this will prove an attractive option as it allows them to pay down the debt with a lower interest rate over time, and with considerably lower monthly repayments as well.
The third option for borrowers opting for loan restructuring involves an extension of the original loan term. In this instance, the term is extended until the end of the existing loan tenure, or until the date when the new terms start. If the loan amount is still too expensive for the borrower, an extension can help relieve the burden a bit. However, one should remember that even a very short extension can negatively affect credit ratings. Therefore, it is essential for borrowers to be aware of how extending their terms could affect their credit ratings and opt for this option only if they still think it is an affordable alternative.
Another option for borrowers opting for loan restructuring is opting to get another loan. This involves getting another loan that is significantly smaller in size compared to the original one. However, just like extension, opting for another loan extension could also have significant impact on the credit score of the borrower. The other major difference between opting for a new loan and extension is that another loan would not allow him to extend his existing terms. This again, could affect the credit score, although not as significantly as extending the original term.
All in all, borrowers should be careful when they are choosing the most appropriate loan restructuring option for their current financial situation. There are other options such as just paying off the current loan, which may be the best solution in some cases. However, just because it is the cheapest option does not mean it is the best solution. A lot of financial experts believe that opting for another loan product may opt for at the most a third less the original amount and help alleviate the borrower’s financial problems.