Introduction
The Reserve Bank of India (RBI) recently introduced a loan restructuring scheme to provide relief for borrowers facing financial difficulties. This scheme allows borrowers to restructure their loans. Loan restructuring helps to reduce the burden of repayment. Loan restructuring can be helpful in difficult situations. But it's essential to understand how it can impact your credit score.
Under the loan restructuring facility, loans that fall under the restructuring plan will be reported as "restructured" in credit reports by credit bureaus. This information could potentially affect your credit score. Use Shriram Finance credit score facilities to keep abreast with changes in your credit score and keep your financial history scoring.
How can Loan Restructuring Impact Your Credit Score?
When lenders review your credit report and find a restructured loan, they may consider you a higher credit risk. This could impact your ability to borrow in the future.
It's important to note that opting for loan restructuring is a decision that should be based on your financial situation and the types of restructuring options offered by lenders such as Shriram Finance. We offer various credit solutions tailored to meet your specific needs.
But remember, loan restructuring and credit score are affected by each other.
This article deep dives into how loan restructuring impacts credit scores.
Eligibility for Loan Restructuring
Loan restructuring can provide short-term relief. However, it's crucial to consider the long-term implications on your credit score and borrowing capabilities.
The loan restructuring scheme applies to various entities, such as commercial banks, small finance banks, local area banks, regional rural banks, co-operative banks (urban, state, district central), non-banking financial companies (NBFCs), and all-India financial institutions. This means that even if you have loans from NBFCs, you are eligible for loan restructuring.
Loan Restructuring and its Impact on Your Credit Score
You must understand the relationship between loan restructuring and credit score before you opt to restructure your loan.
When you opt for loan restructuring, certain aspects of your loan may be modified. The Reserve Bank of India allows lenders to convert interest charges or accrued interest into other credit facilities. Additionally, lenders may reschedule the tenure of your loan repayment based on your income and repayment capacity.
While these modifications can provide immediate relief by reducing EMIs or extending moratorium periods, they may have an impact on your credit score. As mentioned earlier, when a restructured loan is reported as such in your credit report by credit bureaus, it could be viewed as a higher credit risk by lenders. This may make it more challenging for you to obtain fresh loans or credit cards in the future.
Things to Keep in Mind Regarding Loan Restructuring
Before opting for loan restructuring, there are a few important factors to consider:
1. Costs
While loan restructuring can provide short-term relief, it may increase the overall cost of your loan. For example, if the lender hikes interest rates during the restructuring process, your total interest payments may rise. Additionally, if you opt for a moratorium, the unpaid interest will accumulate and increase the outstanding amount of your loan.
2. Alternative Options
Before deciding on loan restructuring, explore alternative options such as liquidating non-essential assets or investments. By using these funds to repay your loan instead of opting for restructuring, you can potentially save on interest payments and become debt-free faster.
3. Application Process
Loan restructuring is not automatic; borrowers need to apply for it through their respective lenders. It's essential to follow the lender's process and provide all necessary documentation for verification.
Documents Required to Apply for Loan Restructuring
To apply for loan restructuring, you will typically need to submit the following documents:
Income Proof Documents:
- Salary slips before and after March 1, 2020
- Income statements (for self-employed/business entities)
KYC Documents:
- Aadhaar card
- PAN card
- Driving license
Bank Statements:
- Last 3 months (for salaried individuals)
- Last 6 months plus statements from December 2019 to February 2020 (for self-employed/business entities)
Additional Documents for Self-employed Applicants and Business Entities:
- GST returns
- MSME registration certificate
- Income tax return
Conclusion
Loan restructuring can provide temporary relief for borrowers facing financial difficulties. However, it's crucial to understand the potential impact on your credit score. Restructured loans are reported as such in credit reports, which could affect your creditworthiness in the eyes of lenders.
Before opting to restructure your loan, check whether you are eligible for loan restructuring. Carefully consider your financial situation and explore alternative options. Track your credit score and take steps to improve it by making timely repayments and avoiding excessive loan requests. While loan restructuring can be a helpful tool, it's important to weigh the long-term implications on your creditworthiness before making a decision.
At Shriram Finance, we understand the challenges faced by borrowers in these difficult times. Get free credit score checks anytime and access other credit facilities like loans for commercial vehicles, two-wheelers, cars, homes, gold, personal finances, or small businesses.
Key Highlights
- Understand the impact of loan restructuring on your credit score.
- Consider alternatives like asset liquidation before opting for loan restructuring.
- Monitor your credit score and take steps to improve it over time.
- Make informed decisions based on your financial situation and consult with lenders to explore the best options.
