Understanding finance

How to restructure a loan If you’re struggling with repayments

better finance™️

Borrowers sometimes repay their loans over many years. During that time, things can change. Costs can rise, pressure can go on income, and businesses can strike trouble.

That means even a loan that was very affordable at the outset could become tricky to repay. Missing repayments can mean you have to pay additional fees and penalties, and there can be an impact on your credit score, too. In some cases, restructuring might be an option.

Here are a few things to think about to help you understand how loan restructuring works, when you might consider it and how you can approach it most effectively.

Talk to your lender early on

It’s worth noting from the outset that, in New Zealand, lenders are bound by rules, including a requirement to consider requests for help from borrowers in hardship. If you’ve encountered a situation that you could not have foreseen, such as the loss of a job or the end of a relationship, you can ask your lender to vary the terms of your contract. That might mean extending your loan term, putting you on an interest-only payment for a period of time or a repayment holiday.

You are within your rights to do this if you have not been in default for two months or more (or two weeks if you have received a repossession warning notice), or have not missed four or more consecutive payments.

What does loan restructuring actually mean?

When we talk about loan restructuring, we mean adjusting the terms of an existing loan to make the repayments more manageable. That might be with your existing lender, whether on hardship grounds or otherwise, or with a new one. You might extend the term of your loan to reduce your required repayment, change the frequency with which payments are made or – if interest rates have changed since you took out your loan – the interest rate you pay.

Restructuring is usually designed to help avoid missed payments, defaults or collections. Sometimes it can also be a way to simply reduce financial stress and make a loan more manageable.

Signs that you need to restructure your loan

There are a few things that might indicate it’s worth thinking about restructuring your loan.

You’re struggling to keep up with repayments

Missing payments or regularly making late payments may be a red flag. You might end up paying penalties or additional fees, and it can affect your credit rating. If it’s a pattern you’re feeling stuck in, restructuring may help.

Ongoing financial pressure

If you’re having difficulty covering everyday expenses alongside your loan repayments, and are having to rely on credit to manage your cash flow, this may also signal an issue that needs attention.

Your income or employment has changed

If you’re on a reduced income, have lost your job, shifted to a less regular income, or are working fewer hours, you might be in a position where restructuring makes sense. A loan that was affordable when you were earning a certain level of income may no longer be if that has changed.

Rising living costs

When your expenses increase, it can put pressure on your budget. Many New Zealand households have experienced this in recent years, and some are more affected than others. If you no longer have as much disposable income to cover your debt, you may need to look at your options.

Using debt to pay debt

If your debt is growing rather than reducing over time, it might be a sign that something needs to be addressed. It’s generally not a good idea to take on new loans or use a credit card to cover existing loan repayments.

Tapping into your savings

An emergency savings account is a great thing to have when an unexpected event puts pressure on your finances. It shouldn’t be something you’re relying on to meet your debt repayments, though. If you’re using up your buffer, it might be time for action.

Difference between loan restructuring, refinancing and debt consolidation

Loan Restructuring

➜

Adjusts the terms of your existing loan with your current lender. You aren’t moving to a different loan provider, just adjusting the loan you currently have.

➜

Changes may include lower repayments, an extended term, or temporary relief. You might extend the term of your loan by a certain period of time to lower what you pay each month. In some cases, you may be able to take a repayment holiday to get through a difficult period. Interest is still charged, but you don’t make any payments for an agreed period of time.

➜

This is typically used when a borrower is facing financial hardship and struggling to keep up. Lenders have obligations under the law in terms of how they work with borrowers who are in unexpected hardship.

Refinancing

➜

Refinancing your loan means you are moving it to a different lender. The new lender will advance a loan that pays off the existing debt.

➜

Sometimes, this can mean you are offered a lower interest rate or better terms. If your credit score has improved since you took out the loan, you might find you have options with lenders who would not have accepted your application previously.

➜

There may be fees involved, so it’s important to have a good understanding of these.

Debt Consolidation

➜

When you consolidate debt, you combine a number of debts into one new loan

➜

This can make them easier to manage because you only have to worry about one loan and one repayment.

➜

This can be most effective when you’re managing a number of high-interest debts and want to combine them into one at a lower rate. It is important to check the details of the loans you’re replacing because a loan that is paid over a longer loan term may end up with a higher interest bill overall, even if the applicable interest rate is lower

What’s the key difference?

Restructuring modifies an existing loan. Refinancing replaces it. Consolidation merges multiple debts into one new one. The appropriate solution for you will depend on your individual circumstances, the loan you have and what you want to achieve.

Types of Loan Restructuring Options

There are a number of common ways that loans are restructured, some we’ve already touched on.

Extending the Loan Term

It’s sometimes possible to extend the term of your loan. This means you take longer to pay it back, and make smaller payments to do so. It will likely increase the total interest you pay over the life of your loan, because you carry the debt for longer.

Temporary reduced repayments

Sometimes you can agree with a lender to reduced payments for a period of time. That could mean no payments or smaller payments.

At the end of that time, you’ll either return to higher payments than you had previously, or you’ll take longer to repay the loan. This option will also likely result in you paying more interest over the term of the loan than you otherwise would have. However, it may save you in late payment penalty interest and/or fees. This can be a solution that works in short periods of financial pressure.

Interest-only repayments

When your loan is “interest only”, it means you only pay the interest that has been charged.

You don’t repay any of the principal amount owing. This means your payments are lower, but you aren’t paying off your loan. Again, this may be a good option if you’re facing short-term pressure.

Changing repayment frequency

You might be able to ease financial pressure by changing your repayment frequency. If you’ve been paying monthly, smaller weekly payments may be simpler to manage. Or perhaps if you’re paid monthly, switching to align your payments might take some admin out of it.

Organising your payments so they go out as your income arrives in your bank account can be a very effective way to ensure you have the funds available.

Interest Rate Adjustment or Fee Waivers

In some cases, you may be able to ask for a lower interest rate to be charged, or for your lender to remove penalties. This may be possible when you have a strong repayment history, and the lender trusts that you’ll soon be back on track.

Step-by-Step: How to Apply for Loan Restructuring

Step 1: Review your financial situation: Calculate your income, expenses and current debt obligations. Be brutally honest about your financial picture and what you need.
Step 2: Contact your lender early. It’s best to get in touch before you miss any payments, if you’re worried that you might.
Step 3: Explain your situation clearly. Why do you need to restructure your loan? Have your circumstances changed? Is it a permanent or temporary change?
Step 4: Submit supporting documents: You may need to show evidence of what has happened. This might mean offering bank statements, breakdowns of your expenses or evidence of the hardship you’re experiencing.
Step 5: Discuss your options: What can your lender offer? What would work for your situation? What’s going to get you back on track?
Step 6: Agree on your new loan terms: Once you’ve decided on the appropriate solution, you’ll need to confirm the repayment amount, loan term and any fees or conditions that could apply.
Step 7: Stick to the plan: Get stuck into paying off your loan. Making consistent payments under the revised agreement will help improve your credit score.

How Does Loan Restructuring Affect Your Credit Score?

The fact that you’ve restructured your loan does not automatically alter your credit score. But if you’ve been in a situation where you’ve missed payments or been late with them, this may have been recorded on your credit file. You might also find that hardship claims are recorded.

Once you’ve determined your solution, making consistent repayments will help to stabilise your score, and over time, you should see it improve as you continue to pay off your debts on time.

Mistakes to Avoid When Restructuring a Loan

Waiting too long to contact the lender after missing payments.
The earlier you can get in touch with your lender, the better. If they know there may be a problem, they may be able to help you before you actually fall behind.
Agreeing to repayment terms that are still unaffordable.
Your new solution needs to be workable; you are no better off.
Ignoring fees, interest changes, or total loan cost.
It’s important to understand the full cost of borrowing for whatever your new loan solution may be. We can help you to understand what you’re agreeing to and how the cost may compare.
Taking on new debt while restructuring an existing loan.
If you’re having trouble with a loan, it’s generally advisable to stay away from taking on any more credit.
Not reviewing alternative options like refinancing or consolidation.
We can help you to look at the options that may be available to you.

Need help?

If you’re worried about a loan or just want to talk about your options, get in touch with us. We’re personal loan experts and can help with any queries you have, whether you have problem debt or just want to know how to pay your loan more quickly.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.