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Loan Restructuring: What Is It and How Does It Work?

What Is Loan Restructuring?
Jason Steele
Jason SteeleUpdated February 27, 2023
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If you’re having problems repaying a loan, debt restructuring may be an option to consider.With loan restructuring, you work with your lender to change the terms and conditions of your loan. A loan can be restructured by extending the repayment term, lowering the interest rate, or reducing the remaining balance. Read on to get an answer to the question, what is debt restructuring? and learn how the restructuring of loans works. Plus, find out about other alternatives that may help you manage your debt.

How Does Loan Restructuring Work?

When restructuring debt, the first thing you should do is contact the lender to explain your situation. Generally, it’s better to be proactive and reach out as soon as you know you won’t be able to afford your payments because of financial hardship, rather than waiting for the lender to contact you after a missed payment. However, lenders are not obligated to work with borrowers to restructure a loan. Your lender could insist that you stick to the original terms of the loan. If that happens, you may get hit with late fees for missed payments and your credit score could drop. After several missed payments, the loan may even be sent to collections.If the lender does agree to work with you, both parties can negotiate about how the debt restructuring will work. With this type of personal loan modification, the lender may offer to adjust your interest rate or repayment term, or lower your monthly payment amount. Once you and the lender work out the details of the restructuring, you’ll sign a new agreement to formally accept the offer. After signing, you’re obligated to adhere to the new agreement’s terms and conditions for repaying your loan.

Personal Loan Restructuring vs Personal Loan Refinancing

Personal loan restructuring is different from loan refinancing. With restructuring, you modify the terms of the existing loan. When refinancing personal loans, you take out a new loan and use the funds from that loan to pay off the existing loan. Ideally, the new loan will have better terms. If you decide to refinance, it’s smart to shop around when applying for personal loans to find the best refinancing rates and terms you may qualify for. Just make sure you understand what are the requirements for a personal loan so that you have everything in order before you apply. Refinancing is usually a quicker process than restructuring, and it could even help your credit since your original loans will be reported as paid off. Here’s a side-by-side comparison of loan restructuring vs. loan refinancing:
Personal Loan RestructuringPersonal Loan Refinancing
Restructures or modifies the existing loanReplaces the existing loan with a new loan, ideally with more favorable terms
May be a longer processMay be a quicker process
Could be difficult to qualify forMight be easier to qualify for
May make loan payments easierMay positively impact your credit score because the original debt will be reported as paid

Private Lenders and Loan Restructuring

Some lenders offer temporary hardship programs that allow borrowers to skip several payments or avoid certain fees. You can negotiate directly with your lender to try to come to an agreement that may be mutually beneficial. For example, the lender may agree to lower the interest rate on the loans or adjust the repayment terms to help make your payments more affordable, rather than risking having you default on the loan.

Types of Loan Restructuring

There are a few different ways a loan can be restructured. Some common methods: 
  • Extending the repayment term of the loan to make payments more affordable
  • Reducing the interest rate to lower the payment amount
  • Reducing the remaining balance on the loan
  • Debt-for-equity swap: This is when a creditor agrees to cancel all or part of the debt in exchange for equity. Debt-for-equity swaps can be done with business loans or mortgages. For instance, a homeowner would trade equity in their home to reduce the mortgage payments. 

Loan Restructuring Alternatives

If you’re in debt, but you don’t want to restructure your loan, or you need more assistance than restructuring can provide, there are other options. 

Filing Chapter 7 Bankruptcy

Filing for Chapter 7 bankruptcy is a court proceeding that can seriously damage your credit, and it should generally be done only as a last resort. This type of bankruptcy filing can remain on your credit report for 10 years, so consider the ramifications carefully before moving forward. In fact, you may want to think about debt settlement instead. There are some key differences between bankruptcy vs debt settlement. With debt settlement, you work on your own or with a credit counselor to settle your debts in a way that allows you to pay less than you owe. In contrast, bankruptcy is a legal process to get your debt discharged. You need to qualify for Chapter 7 bankruptcy, and attorney fees can range from $500 to over $2,000. 

Contact a Debt Management Advisor

Debt management advisors can negotiate with creditors on your behalf. Certified counselors are available through nonprofit credit counseling organizations. Be aware that you may have to pay them a small fee for their services. These professionals may be able to negotiate lower interest rates or payments for you, or get certain fees waived.  

Consolidate Debt 

You can also consolidate your debt to make it easier to pay off. Debt consolidation involves taking out a new loan or a line of credit to pay off your existing debts. Look for a debt consolidation loan that has better terms, such as a lower interest rate, longer repayment period, or lower monthly payments. 

The Takeaway

If you are having trouble making your monthly loan payments, loan restructuring may help make your payments more affordable. Not every lender is open to loan restructuring, however, so contact yours to see if they will work with you. Loan refinancing is another option to consider. With refinancing, you can look for a loan with a lower interest rate and then use that new loan to pay off your existing debt. Refinancing may be faster and easier than restructuring a loan. Before you apply, a guide to personal loans may be helpful to give you some pointers. Lantern by SoFi can help you explore the options for refinancing a personal loan. In our online marketplace, you can get personal loan offers from multiple lenders at once in order to compare them all and find the best loan for your needs.

Frequently Asked Questions

What is the difference between personal loan restructuring and personal loan refinancing?
What happens when a personal loan is restructured?
Do private lenders have loan restructuring programs?
Photo credit: iStock/SDI Productions

About the Author

Jason Steele

Jason Steele

Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.
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