The loan moratorium was originally offered as a temporary measure for retail borrowers to avoid loan repayment default due to the financial distress brought about by the Covid-19 crisis. The moratorium was allowed for six months until August 31, 2020, thereafter it was extended till September 28, 2020, on the Supreme Court’s direction. As it looked like the moratorium couldn’t be extended for a longer period, the RBI introduced a loan restructuring option for such borrowers who are facing severe financial setbacks due to the pandemic.

Some banks have already come up with their restructuring plans under which borrowers who are not able to repay their pending EMIs of the moratorium period may get some sort of relief in terms of deferment in immediate loan repayment requirement after paying the applicable interest during the restructuring period and additional charges. if any. 

Now, the question is: should you really opt for the loan restructuring plan if you’re eligible for it and will it be useful to you? In some cases where there is no way to arrange the repayment dues and the borrower doesn’t want to get into loan default, a restructuring plan can be helpful. However, there are some critical scenarios when taking loan restructuring might not be a good idea. Let’s check out a few such situations where you should avoid taking a restructuring plan and evaluate the best options in such cases.

1. When you have adequate income to repay your loan without restructuring support

If you have sufficient money available with you to repay the outstanding loan amount, it’s not advisable to go for the loan restructuring option. Even if you opt for a restructuring of a single loan product, it will be reported to the credit bureau and reflect as ‘Restructured’. It means, later in the future if you have the requirement of another loan, there could be questions regarding your repayment capacity, which could in turn lead to problems in getting a loan. In addition, opting for the restructuring plan would lead to extension of your loan tenure and snowballing of your interest dues, things that could hinder your journey to achieve financial freedom. So, if you have sufficient funds to repay the loan and don’t have an urgent requirement of such funds, use it to repay the moratorium outstanding. You may borrow again from the bank if you have fund requirements in the future.

2. When you don’t have a repayment plan for the restructured loan

Restructuring requires proper repayment planning. If you don’t have a plan, you may end up hurting your entire finances. You should be aware of your current income and expenses as well as expected income and expenses in the future so that you may be able to keep aside a fund for the payment of the restructured loan. In absence of a plan for repayment of the restructured loan, you may end up paying more money towards interest or choose the wrong restructuring option which you may not be able to fulfil. So, it’s better to stay prepared if you are serious about selecting the restructuring option.

3. When you’re nearing retirement

Restructuring could increase your loan burden and extend your loan tenure to your post-retirement years when repaying could be even more challenging. If you are already unsure about setting up your target retirement corpus, it might be better to avoid the restructuring option which stretches beyond the year of your retirement. You may fall short of liquidity if you enter your retirement with a loan repayment obligation. If you don’t have an option but to opt for loan restructuring even if it stretches to your retirement period, look for a part-time post-retirement income option so that you can handle the extra financial burden.

4. When you can repay at a lower cost of borrowing using another loan

If are planning to opt for the restructuring of high-interest loan products such as credit card outstanding or unsecured loans, it’s better to first explore other options. You may use your fixed deposits or assets to get a secured loan which are likely to involve a lower interest rate and might offer a longer repayment tenure. A secured loan can help you save on interest payable and could also offer greater repayment flexibility. So, avoid loan restructuring if you have an option available to arrange the required money with a cheaper borrowing option.

5. When it disturbs your key financial goals

You may be planning to restructure a loan, but also think about the things you might be putting at stake by doing so. If due to restructuring you are putting your other crucial financial goals like your children’s education fund at risk or doing so would translate to downsizing of your health or life insurance protection or exhausting your emergency fund, you may want to review your decision.

In conclusion, it’s important to understand that loan restructuring is not the final solution but just one of the various solutions available to you to solve the cash-flow issues necessitated by the pandemic. That being said, if you think you must opt for the restructuring plan, do so after careful evaluation of its impact on your finances, have the required repayment plan and exercise a high degree of financial discipline to stick to your plan.