What is debt consolidation vs loan restructuring: which is better?

Debt consolidation vs loan restructuring are the two poles of the earth, and the clear answer is that debt consolidation is a better practice than loan restructuring. Debt consolidation focuses on combining multiple debts into one for credit score building, whereas loan restructuring focuses on the reactivation of the ongoing loan through negotiation with lenders, which hampers the credit score. The only similarity is that both are practised during a financial crunch, but loan restructuring is practised during more intense financial difficulties faced by the borrowers, which is rare but possible. 

Key takeaways: 

1. Debt consolidation is the action of consolidating loans into one form of debt or loan to repay it to build the credit score. 
    
2. Loan restructuring is the action of re-managing the loan policies by negotiating with the lenders.
    
3. Debt consolidation is often considered a better option due to the credit score-building facility it provides. 
    
4. Loan restructuring is a possible practice only when there is a hard financial crunch with the lender’s situation. 

Debt consolidation vs loan restructuring at a glance:

Is debt restructuring the same as debt consolidation? 

Absolutely not; debt restructuring is not the same as debt consolidation. The functions are different sides of the same coin. 

Debt restructuring, which is also known as loan restructuring, is used when there is a heavy financial difficulty from the borrower’s side. It is mainly done through negotiating with the lender who provided the loan to the borrower. 

Three possibilities can happen when one restructures the loans: 

1. The negotiation is a 50-50 possibility; this is because sometimes the lender can agree to lower your loan debt margin or interest rate, and sometimes the lender does not agree to do it. 

2. Restructuring a loan can 100% crash your CIBIL score badly. It permanently damages your credit score, which is nearly impossible to get fixed.

3. Debt restructuring also makes lenders lose their money as the cut is made to the debt margin or interest rate. In short, debt restructuring is a loss-making machine.

On the other hand, debt consolidation is the practice of consolidating multiple debts into one loan, and the borrower pays only a single instalment per month until the loan is repaid. But debt consolidation is not only practised in the form of taking a loan; one can also practise this through a balance transfer.

Debt consolidation is also practised when one is facing a financial crunch in life and is planning to take another loan in the future. Through this, they can rebuild their financial credit score. 

Read More - Debt Restructuring
 

These are the following possibilities for debt consolidation:

1. Debt consolidation lowers the credit score initially, but it boosts the credit score once the repayment becomes regular. 

2. Debt consolidation is easily approved for borrowers as they do not face intense financial hardship.

3. Debt consolidation comes at a lower interest rate with long tenures to cover the debt through monthly repayments. 

Hence, this is how debt restructuring is different from debt consolidation. 

Is loan restructuring a good idea? 

No, loan restructuring is not a good idea, but it is the last option one has to take to cover the debt if they face financial hardship. So, loan restructuring comes with a do-or-die situation. 

Loan restructuring is the reactivation of the ongoing loan with the lender’s approval, which is also not guaranteed. But covering the loan is the priority, and the option that is left with the borrower in an intense financial crunch is loan restructuring. 

These are the reasons why loan restructuring is not a good option:

1. Loan restructuring can cause permanent damage to the borrower's credit score and the borrower’s financial health, which is almost like a big no for re-improvement. 

2. Loan restructuring can bring loss to the lender and the borrower at the same time; this is because the borrower is already at a loss, which is why he did loan restructuring. But the lender, who gets a lower amount in return, also incurs a loss. 

3. One needs to pay additional fees or charges to change the existing loan. These fees or charges also vary from bank to bank. 

4. Loan restructuring also makes it difficult for the borrower to get future loans from the banks, as it damages the financial position and score, though initial relief is provided to the borrower. 

Hence, these are the reasons why loan restructuring is not good for the borrower to overcome or relieve the debt. 

Who can get the debt consolidation loan? 

A person with a good credit score of above 650 can get the debt consolidation loan easily. Simply, a debt consolidation loan is a loan that is given by consolidating multiple loans for borrowers at a lower interest rate with longer tenures. 

Main people who have average credit scores or want to build good credit scores and have the burden of multiple instalments choose the option of a debt consolidation loan. But the major point is that a debt consolidation loan is not for everyone; only a few people who meet the eligibility criteria are approved by the bank to get the debt consolidation loan.

These are the eligibility criteria for the debt consolidation loan: 

Hence, the bank will provide the debt consolidation loans if the person meets the criteria mentioned in the above table; some banks still give relaxations for the credit score till 650. But one thing is important to understand: debt consolidation is mainly taken to build high credit scores and mitigate multiple repayment burdens for lenders. It is the total opposite concept of loan restructuring. 

Who can do the loan modification?

Loan modification is usually done by people who are really going through intense financial stress by changing the interest rate or principal amount to be paid. 

But how will the bank know who is really financially distressed or just wants to take advantage of the loan modification? Here come the eligibility criteria for the loan modification. 

These are the eligibility criteria that one can follow to get the loan modification done: 

1. The person needs to submit proof of financial stress to the bank or the lender to get the loan modified. This can be any of the following: bank statements, a copy of a balance enquiry, or pending bills.

2. One also needs to provide proper income evidence that you are employed so that some amount of money can be adjusted to repay the modified loan.

3. Your active loan should indicate a loan in danger or should be in the default phase. 

Hence, these are the eligibility criteria for the loan modification on the existing loan taken by the borrower.

Is debt consolidation and loan restructuring a form of debt management? 

Yes, debt consolidation and loan restructuring are a form of debt management. Debt management is the broader concept of economics. 

Debt management is the practice of managing debt through financial strategy, which includes debt consolidation, loan restructuring, and budgeting. Debt management brings financial stability and provides long-term financial relief to the borrower from financial stress. 

The following are the functions of debt management: 

1. Debt management provides the proper financial analysis to the lender and borrower in terms of financial changes.

2. Debt management is diverse in nature, as it includes different methods to handle finances to cover the debts.

3. Debt consolidation, budgeting, loan restructuring or modification are some of the forms of debt management. 

4. Debt management is a smart way to build a credit score if managed properly. If not handled smartly, it can create a permanent dent in your credit reports. 

Hence, this is how loan restructuring and debt consolidation are parts of debt management as a broad concept. Though loan restructuring and debt consolidation are concepts under debt management, both function in different ways and are totally opposite when it comes to features. 

Also Read - Loan EMI Repayment Problems in India
 

What are the core differences between debt consolidation and loan restructuring? 

The core difference between debt consolidation and loan restructuring is in terms of nature, scope, functions, and eligibility. 

Both act like fire and ice to each other. In economics, though, both come under the aspect of debt management; debt consolidation and loan restructuring are different forms.  

The table below shows the core difference between debt consolidation and loan restructuring:

Debt consolidation and loan restructuring have always functioned differently in every aspect and also target people with financial stress but result in different ways. One is intense in nature, and the other is slow but helpful in nature. 

Hence, these are the core differences between debt consolidation and loan restructuring, where debt consolidation stands out as being better than loan restructuring. 

Bottom line: 

Debt consolidation and loan restructuring are concepts of debt management. Whereas debt consolidation focuses on building the credit score by combining the existing debt into a single loan at a lower interest rate. On the other hand, loan restructuring is changing the loan aspects in agreement with existing loans, like the interest rate, loan terms or principal amount. Both debt consolidation and loan restructuring are different in nature, scope, eligibility, and functions. Hence, debt consolidation is a better approach than loan restructuring when it comes to credit building, financial stability, and financial position.

FAQs

Do loan modifications usually get approved? 

Yes, a loan modification usually gets approved when one meets the proper eligibility criteria, like proof of financial stress, etc.

Is it a good idea to do a loan modification?

It is a good idea when you want to modify the loan terms in terms of tenure extension, but when it comes to a loan principal amount change or an interest rate change, it can impact your credit score inversely. 

What are the drawbacks of loan modification? 

The drawback of loan modification is that it creates a dent in your credit score when the interest rate or principal amount is changed from the loan agreement. Also, one needs to pay the fees for loan modification.

Who qualifies for debt consolidation? 

One with an age above 21 years and below 65 years is qualified for debt consolidation with a credit score of 700.

Which bank gives debt consolidation loans?

Many banks, like HDFC, IDBI, IDFC, KOTAK, etc., give debt consolidation loans to customers. 

Is 700 a bad CIBIL score? 

No, 700 is generally considered a good CIBIL score.

What is the biggest killer of the credit score?

The biggest killer of a credit score is irregular debt repayments.

Is it hard to qualify for debt consolidation?

No, it is not hard to qualify for debt consolidation if your credit score is above 650, but if you fall below a 650 credit score, it can be difficult for you.

How to increase a CIBIL score from 600 to 700?

One can increase the CIBIL score from 600 to 700 through debt management, which includes debt consolidation, loan modification by changing the tenure of the loan, etc.

What is the 7-year rule for a CIBIL score? 

The 7-year rule for a CIBIL score refers to the marking of financial activities in the credit report for 7 years, which cannot be changed until it is a mistake.  

Debt consolidation vs top-up loan: which is better?

If you only need extra funds, a top-up loan works. But if you want to simplify multiple debts and reduce your total EMI, debt consolidation is the better option as it does not add new debt on top.