There are two main options for borrowers who find themselves struggling to meet payments on personal loans or have identified better deals available within the financial markets in India: either a loan restructuring or balance transfer. Both might look like ways of providing debt relief on the surface, but they are totally distinct from one another. Having an idea about what will suit your specific situation is a good way of saving money and your credit score.
What Is Personal Loan Restructuring?
Personal loan restructuring is an agreement with your current lender that changes your current loan’s terms. It is usually the case when a borrower is unable to afford their existing EMI payments because of a sudden shift in circumstances, like a job loss, cut in salary or any medical emergency.
The lender may agree to increase the loan tenure, decrease the EMI amount, allow a temporary relief period on EMI payments, or even lower the interest rate, depending on the case. The main objective is to avoid defaulting on the account. In India, banks and non-banking financial companies (NBFCs) take RBI directions during loan restructuring and are accompanied by documented proof of hardship.
One point to note about restructured loan accounts is that they typically may be recorded differently in credit bureau reports. This can indicate to future lenders that the borrower had trouble repaying their loan, and this could impact their ability to be approved for loans in the future.
What Is A Balance Transfer?
A balance transfer is the process of going from your original lender to another lender that may have better rates, usually a lower interest rate. This is not a restructuring process, it is a process undertaken at the request of the company. It is a business-friendly choice of the borrowers who are able to repay their loans at a comfortable rate but are looking to lower the total cost of the loan.
If you choose a balance transfer, the new lender will pay off your old loan and give you a new loan for the remaining balance. This amount is then paid back to the new lender at the agreed interest rate and repayment period. This will result in useful long-term savings, especially if there is a substantial spread between the previous and current rates of interest and a substantial term to repay still left.
For example, if you have a good loan of Rs 5 lakh at 18% per annum, and you find another lender who offers 13% interest, you could save a lot of money – sometimes in thousands of rupees – in interest outflow over the balance loan period.
Key Differences At A Glance
Personal loans are generally suitable for individuals facing financial needs while maintaining an average to good credit score.
| Factor | Personal Loan Restructuring | Balance Transfer |
| Purpose | Manage financial hardship | Reduce interest costs |
| Lender | Same lender | New lender |
| Credit Score Required | Not necessarily strong | Good to excellent |
| Credit Score Impact | Likely negative | Potentially positive |
| Fees Involved | Minimal rearrangement fees | Processing + prepayment charges |
| Best Suited For | Temporary financial crisis | Financially stable borrowers |
Impact On Your Credit Score
One often-overlooked factor when choosing between loan restructuring and a balance transfer is the impact on your CIBIL score. Loan restructuring can negatively affect your credit profile because it signals to lenders that you faced difficulty in managing repayments. As a result, your credit score may drop, making it harder to secure new credit in the near future.
On the other hand, a well-managed balance transfer may support your credit health. By shifting your debt to a loan with a lower interest rate and making timely repayments, you can improve your credit utilisation ratio and repayment history – both of which play an important role in maintaining a healthy credit score.
Choosing The Best Option: When You Need To Decide?
The best option will depend critically on your financial situation:
- If you really have a financial emergency and can’t afford your repayment today without defaulting, then opt for loan restructuring. It is a safety precaution, not a cost-saving.
- If your finances are sound, your credit is in good condition (at least 750), and you found a lender with a noticeably better rate and terms for a balance transfer, then this is a good option to consider.
- Before you choose either of these options, always review all of the costs associated with the loan, its term and the interest rates.
Final Thoughts
While restructuring and balance transfer are both valid strategies for debt management, they’re for two different purposes. Restructuring is a hedge against financial distress, and a balance transfer is a cost-saving measure for borrowers who are in a strong position. Determining your repayment ability, credit score, and long-term financial objectives will facilitate you with the most educated choice for your circumstance.
FAQs
Is loan restructuring a good idea?
Loan restructuring is a good idea if you are experiencing genuine, temporary financial hardship and need immediate relief to avoid defaulting on your loan. While it reduces monthly payments and prevents damage to your credit profile from missed payments, it usually results in higher long-term costs due to extended tenure and may temporarily dip your credit score.
Does loan restructuring affect CIBIL?
Yes, loan restructuring negatively impacts your CIBIL score. It signals to lenders that you struggled to meet original repayment terms, often resulting in a temporary score dip and a “restructured” tag on your credit report. While better than a default, it signals higher risk, potentially reducing future borrowing capacity for 5–7 years.
Does balance transfer affect CIBIL?
Yes, a balance transfer affects your CIBIL score. It usually causes a slight, temporary dip due to a hard inquiry when applying for a new card. However, if used responsibly to lower your credit utilization ratio (keeping it under 30%) and manage debt, it can positively influence your score in the long run.
Disclaimer: The information provided on this website is for general informational purposes only and should not be considered financial or legal advice. Please consult with a qualified financial advisor before making any decisions.
