Personal loan restructuring vs loan settlement: Which option is best for you?

Personal loan indebtedness can prove to be difficult to manage, particularly when one is financially distressed. Borrowers tend to turn to two options: loan restructuring and loan settlement. Both seek to bring an end to agony, but making decisions that are in your best interest regarding your financial well-being is based on being aware of these distinctions.

What is loan restructuring?

Restructuring of the loan entails a change in its current terms to help the borrower repay. The process may involve changing the repayment schedule, lowering the rate of interest, or lengthening the period of the loan. The key aim is to make the repayment easier without the borrower defaulting on the loan.

Benefits of loan restructuring

• Reduced monthly payments: EMIs can be reduced by lengthening the term of the loan.
• Credit score protection: The credit score of the borrower remains largely unchanged since the debt is not treated as settled or written off.​

Things to consider

• Extended interest payments: Total interest paid over a longer period might be higher even as monthly payments could be lower.
• Eligibility requirements: Lenders typically assess the financial situation of the borrowers before restructuring; not all borrowers could be eligible.

What is loan settlement?

If the lender and borrower decide to pay a lesser amount, less than what is to be paid in total, then effectively the loan has been closed down. When there is a moment when the borrower doesn't have enough money to afford paying for the loan itself in total, such an option becomes taken into consideration frequently enough.

Benefits of loan settlement

• Instant debt relief: Through the repayment of the loan upfront, the debt burden can be removed, resulting in short-run freedom from financial obligations.
• Prevention of legal action: Through settling, potential legal action that might be taken in case of a long-running default can be avoided.

Things to consider

• Effect on credit score: Settling a loan impacts your credit score negatively by a huge margin, which will limit future borrowings.
• Limited access to future credit: A paid status on your credit report can lead to higher interest rates or discourage lenders from reviewing future loan applications.

Key differences between loan restructuring and loan settlement

In conclusion, an individual's personal financial state alongside their future goals will help them select between debt restructuring or loan settlement. Before deciding it is best to consult with financial consultants and be straightforward with lenders about all available options.

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