Car Loan Restructure: Everything a Filipino needs to know before applying

Owning a car is often seen as a necessity for many, given its convenience in navigating the country's busy streets. However, financing a car can sometimes become overwhelming, especially when the lender faces personal financial constraints. For many Filipinos who have taken out car loans, the monthly payments can be daunting over time, and when financial difficulties arise, it’s essential to understand your options. One such option is car loan restructuring.

In this article, we will cover everything you need to know about car loan restructuring, how it can help you manage your financial obligations, and what to consider before applying. Additionally, we’ll shed light on the differences between car loan restructuring and car loan refinancing, two terms that are often confused but have distinct meanings and implications.

What is car loan restructuring?

Car loan restructuring refers to a process where you work with your lender to change the terms of your existing car loan.

The primary goal of restructuring is to make the loan more manageable by adjusting payment terms, reducing the monthly payments, or extending the loan period. It's a way to offer financial relief when you’re struggling to keep up with your current loan payments.

When you restructure your car loan, you aren’t taking out a new loan. Instead, you're renegotiating the terms of the original agreement to make it easier for you to meet your financial obligations. This could involve extending the loan term, reducing interest rates, or switching to a more favourable payment schedule.

Also Read: When and why to refinance your car loan

Car Loan Refinancing vs. Car Loan Restructuring

While car loan restructuring is often confused with car loan refinancing, it serves different purposes and involves distinct processes. Here’s a breakdown of the key differences:

 

Car Loan Refinancing	Car Loan Restructuring
In refinancing, the borrower takes out a new loan to pay off the existing car loan. The new loan usually comes with more favourable terms, such as a lower interest rate or a longer repayment period.	Restructuring, on the other hand, involves adjusting the terms of the existing loan without taking out a new one.
Refinancing is often an option for borrowers who have improved their credit score since they first took out the loan, or for those seeking to reduce the overall cost of the loan.	This option is more suited for borrowers facing financial difficulties who are unable to keep up with their current loan payments.
The borrower is essentially switching to a new lender or renegotiating with their current one to get a better deal.	The goal is not necessarily to save money in the long term but to reduce the immediate financial burden.

 

Note, we have discussed car loan refinancing in detail in our previous articles and it is a great option for those who want to take advantage of better financial terms. However, car loan restructuring is more focused on providing immediate relief for borrowers in financial distress.

Also Read: Pros & cons of refinancing your car loan

How does car loan restructuring work?

The restructuring process typically begins when you approach your bank or lending institution to discuss your financial situation. Here’s an overview of how the process works:

1. Assessment of financial situation: You’ll need to present your current financial status to the bank. This includes income, expenses, and any other factors that affect your ability to repay the loan. Lenders will assess whether restructuring is a viable option for you.

2. Negotiation with the lender: Once the bank determines that you qualify for restructuring, you’ll negotiate new terms. These could include extending the loan period, reducing monthly payments, or changing the interest rate. The aim is to create a new repayment plan that aligns better with your financial capacity.

3. Finalisation of new loan terms: Once both parties agree on the new terms, the loan restructuring is formalised. The new repayment schedule goes into effect, and you start making payments based on the revised terms.

Pros & cons of car loan restructuring

There are several key benefits to restructuring a car loan, especially for those experiencing financial hardships. However, it is essential to understand its potential downsides.

Pros	Cons
Lower monthly payments: By extending the loan term or renegotiating the interest rate, you can reduce your monthly payments, making them more manageable.	Extended loan term: By spreading payments over a longer period, you might be paying more in the long run. While the monthly payments decrease, the total interest paid over the extended term could increase, meaning the overall cost of the loan goes up.
Avoiding default: Loan restructuring allows you to avoid defaulting on your loan, which can severely damage your credit score and lead to the repossession of your vehicle.	Impact on credit rating: As mentioned earlier, while loan restructuring is generally better for your credit than defaulting, it can still negatively affect your credit score. Future lenders might view you as a higher-risk borrower, which could make it harder to secure loans down the line or could result in higher interest rates on future loans.
Financial relief: With reduced payments, you’ll have more room in your budget to handle other essential expenses or unforeseen financial challenges.	Approval is not guaranteed: Lenders will carefully assess whether you qualify for loan restructuring. Not everyone is eligible, and some banks may reject your application if they believe restructuring won’t significantly improve your ability to repay the loan.
Customised repayment terms: Restructuring offers repayment flexibility, allowing you to agree on a payment schedule that suits your current financial situation.	Potential fees: Some lenders may charge processing or administrative fees for restructuring the loan. It’s important to factor these fees into your decision

 

Factors to consider before applying for car loan restructuring

Before deciding to restructure your car loan, it’s important to weigh the potential downsides and consider whether it’s the best solution for you:

1. Longer loan term: While restructuring can reduce your monthly payments, it often comes with the trade-off of extending the loan term. This means you could end up paying more interest over the life of the loan.

2. Impact on credit score: While loan restructuring is generally less harmful to your credit score than defaulting, it can still lower your credit rating, making it more difficult to secure loans in the future.

3. Approval process: Not everyone qualifies for loan restructuring. Lenders will assess your financial situation carefully, and there’s no guarantee they will agree to restructure the loan.

4. Additional fees: Some lenders may charge fees for restructuring the loan, which could add to your overall debt.

How to qualify for car loan restructuring

Qualifying for car loan restructuring depends on the policies of the lender and the borrower’s financial situation. Here’s what lenders typically look for:

1. Proof of financial hardship: Borrowers need to show that their financial difficulties are temporary but significant enough to impact their ability to make regular payments. Lenders will ask for documents such as payslips, proof of income, and detailed monthly budgets.

2. History of payments: Lenders prefer borrowers who have been making payments consistently before falling into financial hardship. If you’ve defaulted on several payments already, it may be harder to convince the lender to restructure your loan.

3. Clear financial plan: Be prepared to present a clear financial proposal that shows how restructuring will help you meet your obligations. Lenders need to see that the new payment terms will work for you without compromising their financial interests.

Alternative options for car loan restructuring

If car loan restructuring doesn’t seem like the right solution for your situation, there are other options to consider:

Car loan refinancing: As mentioned earlier, refinancing may be a better option if you qualify for lower interest rates or more favourable loan terms. It allows you to replace your current loan with one that fits your financial capacity better.

Debt consolidation: If you have multiple debts, consolidating them into one loan with a lower interest rate may simplify your payments and reduce your financial burden.

Selling the car: If making the payments is no longer feasible, selling the car and paying off the loan might be the best option. It can prevent further financial strain and avoid repossession.

Voluntary surrender: If the situation is dire, you might opt for voluntary surrender of the vehicle. This will negatively affect your credit score, but it can prevent the stress of mounting debt and repossession.

Bottom line

Car loan restructuring is a critical option for Filipinos who are struggling to keep up with their car loan payments due to financial difficulties. It offers an immediate solution by adjusting the loan terms to make them more manageable, helping borrowers avoid default and the potential repossession of their vehicle.

Also Read: Mistakes to avoid when refinancing your car loan