Yes, you can refinance private student loans and you should, but only if you manage to get a lower interest rate. Refinancing at a lower rate is the single best way to lower the overall cost of your student debt. Before choosing this option, it helps to understand the many intricacies involved in refinancing.
Refinancing is essentially exchanging one loan for another. Why would anyone do that? Primarily to get a lower interest rate on the new loan. As your financial situation improves, you qualify for lower interest rates when you borrow money. Refinancing allows you to get rid of your old, high-interest loans and take on new loans at lower rates. This can save you a substantial amount of money over the term of your loan.
You can refinance private as well as federal student loans. However, the federal government does not refinance loans. You will have to refinance your federal student loans through a private lender. It then becomes a private loan with none of the benefits associated with the federal loan. Only consider refinancing federal loans if you’re 100% sure you’re not interested in pursuing any forgiveness program.
There are few downsides to refinancing private student loans but you will need to meet the lenders’ eligibility requirements to get approved. The exact requirements vary from one lender to another. In general, you will need the following to qualify for refinancing:
These are just the basic requirements to get approved. Your main aim however is to score the lowest rate on your refinanced loan. Here’s what you can do
Lenders may set the interest rate on your loan but that doesn’t mean there’s nothing you can do to influence it. How you handle your finances plays a key role in your ability to get a low rate. Lenders offer lower rates to borrowers whose records show that they are financially responsible. There are two ways you can do this:
Making all debt payments on time every single time is the best way to steadily improve your credit score. A single missed payment can ding your score. If you struggle to keep track of payment deadlines, set up autopay through your bank. The payments will get sent out automatically on the set date without fail. As an added bonus, lenders also offer a rate reduction on payments made through autopay.
A high debt to income ratio means most of your income is going towards paying off current debts. Under these circumstances, you are more likely to struggle with paying back any additional debt. Cutting back on discretionary expenses is one way to lower your debt to income ratio. You can lower it further by adding on another source of income.
A combination of high credit score and low debt to income ratio will get you the lowest interest rate possible.
Lenders do not offer a fixed rate to all borrowers. When you enquire about refinancing rates, the lender will first do a soft pull on your credit. If you have good credit, they will offer you a lower rate of interest. If your score is low, most lenders will reject your application. Those who do will quote a higher rate of interest.
When you submit a formal loan application, the lender will do another pull on your credit. This time they will do a hard credit pull to get a detailed look at your credit history. Depending on what they find, they will offer you a finalized rate, which could be higher or lower than their initial quote.
When a hard credit pull is done, it causes your credit score to drop a few points. The drop caused by a single hard pull is negligible. However, several hard credit checks cause your score to drop sharply. It’s important to understand this so you don’t submit too many applications randomly.
Make your inquiries first. Where possible, use the lenders’ prequalification tools to determine your eligibility. Do your research first and only apply when you are satisfied with the lender’s rate and other terms.
If, for whatever reason, you need to submit another loan application, try and do this within thirty days. Multiple hard checks performed within a 30-day period will do less damage to your FICO score than multiple checks performed outside this window.
We said earlier, there are no major downsides to refinancing private student loans. However, there is potential for making a few mistakes that may have other long term repercussions.
Ideally, you should refinance private student loans as soon as you qualify for a rate that’s lower than your current rate. The sooner you refinance, the more you’ll save in accrued interest over the term of the loan. You could potentially lower your monthly payments too. You can refinance private student loans multiple times and there are no fees involved, so there’s no reason to delay it.
It can take time to complete the refinancing process. Until such time that the process is completed, you have to continue making payments on your current loans. Discontinuing payments on your current loans will be considered as missed payments.
You’ve got a new loan with a lower rate, and without damaging your credit score either. To protect and improve your credit score, you must continue to make timely payments on your new loan. Missing payments on your refinanced loan will impact your credit score adversely.
Don’t stop at refinancing your private student loans just once. Keep working towards improving your financial situation and refinance multiple times to get progressively lower interest rates. This will lower the total cost of your debt significantly.
We hoped you enjoyed this article! Remember, you canand potentially lower your monthly student loan payments and save money.