Loan refinancing and restructuring are two separate procedures. Still, they often invoke the same image—a desperate company on the verge of bankruptcy making that last effort to keep the business going. However, this is not always the case.

Whether a company is refinancing or restructuring is often lost in translation. Many financial institutions, including seasoned finance professionals, use the words interchangeably when they are wholly different processes.

Make sure you know the difference before refinancing or restructuring a loan. This information can help you to make the right decision. 

Fundamentally, refinancing and restructuring are debt reorganization processes that strengthen a person or company’s financial outlook. Debt refinancing refers to initiating a new contract to pay off a loan, often at better terms than a previous one.

Loan restructuring

For more dire situations, borrowers turn to loan restructuring. This term is often confused with refinancing or refixing. However, restructuring is more than just locking in a new interest rate. 

Restructuring occurs mainly in exceptional circumstances, where borrowers are deemed financially unstable and are unable to meet debt obligations. An example of a typical restructuring would be lengthening the due date for the principal payment on a debt contract or modifying the frequencies of interest payments. 

Restructuring can also negatively affect your credit score, which is why it is a last-ditch strategy. Restructuring your loan saves your money on interest payments and helps pay off your mortgage faster.

Restructuring is usually a combination of the following:

  • Locking in a new interest rate
  • Fixing part of your mortgage
  • Setting new term limits
  • Setting new loan repayment amounts.

In debt restructuring, you must negotiate with the financer to find a way out where both parties benefit. Talk to a private lender if you can’t pay your loan on time or your financial situation is not so good.

Financers don’t want borrowers to default on their loans because of the cost of bankruptcy. In this case, financers will agree to negotiate with borrowers to restructure the loan on a few conditions. These terms could be waiving late fees, extending payment dates, or changing the frequencies and amount.

Loan refinancing

Refinancing a loan refers to debt reorganization. An example would be to apply for a new, cheaper loan and use the proceeds from that loan to pay off the liabilities of an existing loan.

Borrowers with good credit scores can significantly benefit from refinancing as they can secure more favorable contract terms and lower interest rates. Essentially, you are replacing one loan with another. So you often use the loan refinancing option when there is a change in interest rates that may influence newly created debt contracts.

Reasons for loan refinancing:

  • To have better financial benefits in terms of interest rate.
  • To have a longer duration for loan repayment.
  • To borrow an additional amount to pay off the previous loan.
  • To minimize the cost of debt. 

Loan refinancing allows you to pay less interest over time for the same loan. It is essential to check provisions before paying the loan amount before maturity. Some financers impose penalties in the case of early loan repayment. In such situations, calculate the net present value of one loan and compare it with another.

If you’re considering refinancing, look beyond just interest rates. Get clear about what happens if you terminate your current contract and the fees associated with early termination. Some lenders will offer cash-back incentives or waive application fees for switching. If you’re unsure how to do this research, you can have a word with your lender about these provisions.

Types of loan refinancing

There are different types of refinancing options. Some of them include - 

1. Rate-and-term refinance - This is the most common type of refinancing. Rate-and-term refinancing occurs when you pay the original loan and replace it with a new loan agreement that requires lower interest payments.

2. Cash-out refinance - A lending transaction in which an investor gets a new loan and uses that amount to pay off the balance of the previous one. After paying back the old loan,  a borrower can keep the balance amount.

3. Cash-in refinance - Allows you to pay down some part of the loan for a lower loan-to-value (LTV) ratio or smaller loan payments. Cash-in refinance, similar to a mortgage recast, is where financers agree to change mortgage loan terms after you make a lump-sum payment. 

The only difference is that with a mortgage recast, you keep your current mortgage rate and term, and your lender simply accepts your cash payment. 

4. Consolidation refinance - In some situations, a consolidation loan may be an impactful way to refinance. It requires the person or business to apply for a new loan at a lower rate. Then pay off existing debt with the new loan, leaving their total outstanding principal to pay at less interest rate.

Difference between loan restructuring and loan refinancing

Loan restructuring

Loan refinancing

Restructuring is changing the ongoing terms of the loan to change the existing contract terms.

Refinancing is switching an ongoing loan from one financial institution to another financer.

The primary objective of restructuring a loan is to ensure a monthly payment or avoid default. 

The principal aim of loan refinancing is to repay the previous loan and use better interest rates and loan terms. 

When a person opts for restructuring, the credit report shows restructured on official documents. 

There is no effect on the credit report when a person opts for refinancing. 

Loan restructuring can affect your credit scores negatively. It’s challenging to maintain the credit score again after restructuring the loan.

Loan refinancing may impact your credit score for some time. However, the temporary drop bounces back once you start repaying the loan with the new financer. 


Although debt restructuring and refinancing seem to be the same, both are different processes and can have other objectives. Make sure to understand the variations between both so you can choose the right one according to your financial needs. There are a few points of difference between restructuring and refinancing. But both play a crucial role in short and long-term financing.

Refinancing and restructuring a loan can be the last option as they also affect the credit score. On the other hand, microloans can be the best bet to fulfill your financial requirements when needed. In fact, microloans are easier to pay off due to more flexibility. They also help improve your credit score so you can qualify for more extensive, traditional loans.

Lendee is a trusted money borrowing app that helps borrowers apply for a microloan in just a few taps. 

Refinancing or restructuring requires a lot of paperwork or rigid eligibility criteria. But don’t worry because you can use Lendee to obtain extra funds without those complications.