How to restructure loans and work with struggling borrowers

Loan restructuring is a common aspect of being a money lender. Borrowers, with sincere intentions to repay, often face hurdles such as economic shifts, unexpected emergencies, and other unforeseen circumstances. These factors can impede their capacity to meet loan commitments, prompting the need for practical solutions like loan restructuring.

Some borrowers might openly communicate their difficulties, while others could hesitate to admit their challenges (find out why Nigerians don’t pay back their loans). For those genuinely willing to repay but facing obstacles, continuously pressuring them without offering solutions is counterproductive. It’s important to provide assistance; otherwise, you might lose money or turn a good person into a bad one.

So, here are the ways you, as a responsible lender, can help restructure loans for struggling borrowers: 

Time restructure

If a borrower has taken a single loan from you, adjusting the repayment structure is possible. Instead of insisting on a specific deadline, you can be flexible by saying, “Given your current situation, we can tweak the repayment schedule to better suit your needs. Let’s find a fair and agreeable timeframe for both of us.“

Amount restructure

You also have the option to reorganise the repayment amount by dividing it into monthly instalments. This way, a struggling borrower can handle their financial obligations more comfortably, helping them avoid feeling overwhelmed by financial woes.

Interest/principal restructure

Another way to help borrowers through tough times is by tweaking how they repay loans. One way is splitting the interest (the smaller chunk) and principal (usually the bigger chunk). Let them tackle the interest first, especially during their peak financial vulnerability, and they can handle the principal later. This eases the borrower’s financial load without leaving you unpaid. Read more about interest rates.

Total loan restructure

Upon carefully evaluating a borrower’s circumstances, you may also be able to offer a total loan restructuring option. This involves closing the existing loan and its terms (T&Cs) and creating a new loan with an adjusted repayment period (tenor) and structure that better aligns with the borrower’s current financial situation.

Waived-off penalties

If you’ve previously charged late fees or penalties to a defaulting borrower, whom you’ve now realised is struggling financially, you might consider waiving those fees and offering a lower payment plan.

5 key points for safe and successful loan restructuring

1. Maintain accurate and timely documentation of all modifications.
2. Have the borrower sign a revised contract to document the agreed-upon restructuring T&Cs.
3. It would be beneficial to request new collaterals.
4. Ensure you maintain ethical debt collection practices.
5. Be empathetic towards struggling borrowers and be well aware of the circumstances that led up to their loan default. 

Also read: Starting lending in Canada? Here’s how to get licensed

Lending with a heart 

When handling loans, it makes sense to take a take-charge approach. Why not explore restructuring options early on instead of waiting until the last minute? Doing so allows you to work with your borrowers to create plan Bs and find solutions that benefit everyone involved. 

As a lender, understand that unexpected challenges can arise, and collecting outstanding loans is important to your loan business (these two truths can co-exist). However, you can go beyond mere collection efforts by offering loan restructuring options and aim to build lasting relationships with your borrowers. Do you have more questions on how to go about loan restructuring? Reach out to us at [email protected].