Debt restructuring is nothing but a change in the repayment terms of a loan.
Restructuring is guaranteed to bank customers under banking law:
The bank should, at the request of the borrower, allow the debt to be restructured by changing the terms and dates of repayment specified in the contract, if it is justified by the bank’s assessment of the borrower’s financial and economic condition.
The loan is restructured in order to adjust the terms of debt repayment to the borrower’s current financial situation. In this way, the banks support their clients, while ensuring themselves the profit from the margin repaid by the Borrower.
The most common case that affects the change in the financial situation of the client is the loss of a job, another source of income or a contractor.
In such cases, it is justified that the Borrower will not be able to repay the loan on terms that he originally accepted.
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The best solution for him will be the decision to restructure his debt. The worst – an attempt to hide your own changed financial situation in front of the bank.
Remember that debt restructuring is a good idea if you’re only looking for a worsening situation – and not when it has already happened.
This will be a signal to the bank that as a customer you are alert and responsible. Also, your financed situation will not be so hopeless enough so that you can not negotiate good conditions for restructuring from the Bank.
It is worth noting, however, that there is nothing in the world for free. Each new credit operation will involve additional fees. Changing the terms of the loan, you must therefore expect an increase in the total cost of the loan.
Banks usually propose several solutions, among which the customer can choose the best way to restructure debt. Here are the most frequently implemented processes:
1. Change of the repayment schedule
It usually involves extending the total loan repayment time. By increasing the amount of installments to be paid, the amount of each installment decreases significantly.
Such an operation, however, will result in the bank charging us with larger interest. We must choose what will be more beneficial for us.
2. Balloons installments
It is a conversion of fixed installments into increasing installments.
Thanks to such a solution, the Borrower will be able to pay small or even zero installments in the coming months from granting the bank’s debt restructuring. In the future, these costs will be evened out, and the installments will be significantly increased.
3. Credit holidays
It is nothing but suspension of debt repayment. Credit holidays allow you to take advantage of a few months break in repayment of loan installments.
It is worth remembering, however, that the interest that we would pay at this time along with the installments will not disappear or decrease. They will still be charged, and their repayment will be charged to the client with subsequent repayments.
It is possible for the bank to combine several loans taken by the client into one, based on better terms and lower interest rates.
A new repayment schedule is then established, so that instead of several monthly installments to be paid back, the Borrower would have to worry about one.
Sometimes banks offer consolidation of liabilities contracted in several different banks. Such a solution will greatly facilitate the Borrower’s repayment of such debts. Instead of a few installments sent to several different banks, he will be able to pay off one smaller installment in only one bank.
5. Change in the interest rate
This option is difficult to implement – although not necessarily impossible. Reducing the interest rate on the loan is not beneficial for the bank, because it reduces its profit from the margin in this way.
However, it happens that the banks agree to such a solution – knowing that if they do not decide to lower the interest rate, the Borrower will not repay the debt, not having the conditions.
6. Granting a new loan
Although this solution may sound absurd for a Borrower who can not repay one debt, it may happen that granting another loan is the best solution.
Such a situation applies to those clients who are in a frightened situation – they have not repaid their installments for a long time and are threatened with bailiffs’ execution. In this case, the bank may grant a new loan to repay the current debt. The client will deal with a threatening-looking debt, but will remain with a new loan to repay.
It is worth noting, however, that repaying a new loan from scratch is a chance to rebuild a good credit history and the image of oneself as a reliable customer.
7. Loan conversion
Although it sounds quite simple, it is a very risky operation. Loan conversion may turn out to be beneficial if the reference rate of a given currency fluctuates around small values. Thanks to this, the interest rate on the loan will decrease, and with it – its installment.
Currency conversion, however, is very risky due to possible jumps in the value of currencies for which neither the bank nor the Borrower have any influence.
8. Security sale
Another (although often difficult for the client to accept) the method of restructuring the debt may be the sale of the object that secures our loan.
Thanks to this solution, the funds obtained from the sale of a given good (often a mortgage) will be able to be used to repay the debt.
Of course, the bank will not take away the entire amount obtained through the sale of a given collateral. You will be charged as much money as the sum of the debt in the bank.
If there were more funds from the sale of collateral – we will keep the surplus. If less – we will still be debtors of the bank.
This solution will work for all loans granted under very unfavorable conditions.
A borrower unable to cope with the repayment of such a loan has the option of transferring it to another bank, where conditions and interest rates will be more favorable to its financial situation.