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Financial Planning

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Loan Restructuring

In this section, we will understand the concept of loan restructuring. It is somehow similar to loan refinancing that we have learned earlier in this module. So, let us begin: 

Loan restructuring is the process of renegotiating the terms and conditions of the loan taken so as to make repayment of the loan easier.

This should be done when you feel that the EMI is taking too heavy a toll on your income, or when you are nearing bankruptcy.

There are two ways to restructure your loan -

First, restructure your loan for a lower Interest rate. 

Talk to your lender. Explain that you have a genuine interest in repaying the debt.

Most lenders would rather restructure your loan than turn you into a ‘bad debt’ on their books and lose the money altogether. 

Try to refinance in such a way that you get a lower rate of interest as well as a lower tenure. Most individuals end up getting a lower interest rate i.e. lower EMIs, but a longer tenure. 

Therefore, you will be paying back the same or perhaps a higher amount in the long term. 

This would be helpful if you need to ease the current strain on your cash flows by reducing your EMI.

Also remember, if you are refinancing a home loan, there are conditions and payments which need to be considered such as -

i. Minimum number of EMIs paid on the existing home loan; 
ii. Prepayment penalty by the existing home loan lender; and 
iii. Processing fees paid to the new home loan lender. 

If the new home loan is cheaper and the savings by lower EMIs are greater than the fees you may incur, then refinancing your home loan is a suitable option for you. 

Second, see if a Balance Transfer is Suitable. 

For credit card debt, you can opt for a balance transfer, but this has to be done carefully. 

There are a number of schemes in the market where you can transfer your outstanding balance on your existing credit card to a brand new credit card with as low as a 0% interest rate.

Unfortunately, these rates are introductory only – i.e. they will last perhaps 3 to 6 months. 

Thereafter, the rate charged on the new credit card will increase to the pre-stipulated rate. 

Therefore, evaluate the benefits you will gain from shifting your credit card balance before actually doing it.

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Units 26/35