How you can change your loan payment terms with debt restructuring or refinancing.

If you are in an unstable financial condition, learn about refinancing and restructuring your financial loads.

Debt Refinancing

After the Adani-Hindenburg crisis, a finance term that has been circulated everywhere is "debt refinancing". Here is a little pretext on the Adani group’s plight with the Hindenburg group. The top banks -- Barclays, Standard Chartered, and Deutsche -- have lent the Adani Group a loan of $4.5 billion to purchase Holcim Cement Ltd. A part of this loan was due on March 9, 2023. The lenders were in talks with Adani's group about restructuring this loan. 

But they backed off once Hindenburg published their reports stating allegations against the Adani Group. Recently, the spokesperson of the group announced that they have decided to prepay $500M of the loan amount. 

Though the whole fiasco has raised many eyebrows, it has brought to light a not-so-discussed financial policy, which is debt financing. Individual debtors and organisations are piqued and wonder if debt restructuring is an option for them. If you are one of them too, this article is for you.   

What is debt refinancing?

When you pay off a loan, you always look for favourable terms and options that help you modify its payment duration or interest rates. As a loan is more of a financial burden, even small modifications in it can help you settle it quickly. That’s exactly where debt refinancing falls. Debt refinancing is the term that denotes receiving a new loan term in replacement of your old terms. With this refinancing structure, you can leverage market volatility and national monetary policy and end up paying lower interest than what you signed up for.

Also Read: Smart ways to reduce your loan stress

Can individuals go for debt refinancing?

Debt refinancing is an opportunity that both individuals and corporate customers can make use of to alter the payment schedule or interest rates. You can utilise this for any type of loan -- student loans, home loans, or vehicle loans.

How does debt refinancing work?

Borrowers have to approach their lenders and place a refinancing request. Not all can request debt restructuring. You must have a good credit score and repayment history, to begin with.

Refinancing requires you to start a new loan application altogether and get your credit profile re-evaluated. Once it’s approved by the lender, you will receive the new loan agreement. 

Your improved credit score along with market rates will help you receive a new and more advantageous loan structure. 

Why should you go for debt restructuring?

As there is an unstable economic condition in the Indian market right now, this is the right time to reduce your financial load. Here are the benefits of debt refinancing when you pay off a loan.

Paying off loans quickly 

Most debtors accept loans in a desperate situation. This makes them agree to most terms that banks lay unless they find another bank with better terms. But this situation may drain your resources by increasing your liabilities and reducing the settlement window. When you choose debt refinancing, you replace your credit agreement and cut interest rates up to 2%. This can make a huge difference if your monthly dues are higher. You will get a chance to modify your amortisation calendar as the annual interest rate and the total period vary.

Changing loan structure

Refinancing will help you modify the initial loan structure you chose based on what’s more favourable now. If you have accepted a loan with a floating interest structure that leads to higher interest payments, you can change that into a fixed-rate loan. Or, if you have multiple loans, you can go for loan consolidation and combine them all together. 

Reduce your liability.

Many borrowers are trapped in high-interest loans that make them pay more than market rates. This will cause an unnecessary cash crunch. Loan restructuring can help here as it reduces the liable amount by reducing annual interest rates. Thus, you can manage your cash flow better and save more. 

Things to remember while going for debt refinancing

  1. Make estimations on how much you save when you opt for lower interest rates. If there aren’t many changes to the final liable amount, refinancing may not be the most suitable option.

  2. There might be a cost associated with debt refinancing. You may incur a credit request fee, application fee, and processing fee that is negligible in most cases. But keep this in mind if savings is your ultimate option.

  3. Your current financial situation may play a role in the acceptance of your refinancing application. Even if you have a higher credit score, you can still get rejected on the grounds of financial stability.

Final words

Debt refinancing is the best when you are paying off a loan with a higher interest percentage. But it doesn’t fit every borrower and their loans. Talk to your financial advisor or your loan in charge to know if debt restructuring will be the best option for you. As financial products come with complicated terms, it’s always best to go through your credit agreement twice before coming to a conclusion.

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