Loans are financial liabilities - you must pay a certain portion every month to clear the balance. This keeps your credit score unharmed. Yet, unforeseen emergencies can impact your ability to repay.
In such situations, loan restructuring could be a great option. However, it's important to note that loan structuring isn't an automatic process. You need to formally apply for the process and discuss the terms with your lender. Nevertheless, assessing its impact, particularly on your credit score, is essential for making an informed decision.
Reflection of a restructured loan in the CIBIL report
Loan restructuring was a one-time scheme issued by the RBI during COVID-19 to ease the repayment burden for borrowers facing financial problems. The process remains similar and straightforward to date. You must collaborate with your lender to modify terms like interest rate and tenure, or temporarily reduce your monthly payments. Although it offers temporary flexibility and relief, it does have an impact on your credit report.
Understanding the meaning of a restructured loan in your CIBIL report is crucial. In India, lenders report your restructured loans to the Credit Information Bureaus (CIBIL), meaning, it is reflected in your credit report. There is a separate section detailing the status of your loans, with a restructured loan being highlighted. It shows your future lenders that your financial journey took a turn at a point.
Loan restructuring effect on CIBIL
Your credit score will display a temporary dip as it shows that you haven't been able to comply with the original terms of your loan. Here's how it can affect you in the future -
- Reduced borrowing power: A low CIBIL score due to restructuring can limit your future borrowing power, potentially impacting the maximum loan amount you qualify for.
- Stricter criteria: Lenders might apply stricter criteria if you have a history of loan restructuring. This could involve a higher down payment requirement or a less favourable interest rate.
How to improve your CIBIL score after restructuring
It's recommended to explore your alternatives before opting for restructuring. The following points can help you gradually improve your score and remove the loan restructuring effect on your CIBIL score -
- Ensure timely payments: You should promptly complete all Credit Card and loan payments. Consider exploring debt consolidation options if managing multiple debts with different due dates is challenging. You can opt for an Axis Bank Personal Loan to get loan amounts up to ₹40 lakh and interest rates starting from 10.99% p.a.
- Maintain a healthy credit utilisation ratio: Keeping your credit utilisation ratio low is essential for a good credit score. Cut a portion of your available credit to demonstrate responsible credit management.
- Stay updated with your credit reports: A hit is generated across your report every time you enquire or apply for a new loan, which can impact your score. So, try keeping it minimal and regularly monitor the report for any discrepancies.
Also Read: What is Home Loan restructuring & how does it work?
Conclusion
While loan restructuring offers temporary relief from financial difficulties, it's important to recognise the importance of a restructured loan in the CIBIL report. If you understand the implications, take proactive steps to maintain timely payments and monitor your credit report, you can reduce the negative effects and work towards improving your creditworthiness in the long run.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
