Refinancing involves paying off high-interest loans and taking on new loans with lower interest rates. Before any lender approves of such a transaction, they will first want to assess the risk factor. Will their money be safe with you? Can they trust you to repay the loan on time? Assessing the risks is especially important because there are no collaterals involved in student loan refinancing. No lender wants to deal with the hassle of collecting dues from borrowers who are unable to pay back the money. Credit score is the key factor lenders look at before approving any loan application.
Your credit score reveals a lot about your financial circumstances as well as your sense of financial responsibility. If you’ve been making all of your payments on time so far, your credit history should be great. It shows that you are financially responsible and committed to clearing your dues on time. This is reassuring to lenders, who are then more likely to approve you for refinancing.
With a good credit score, you’re likely to be approved quickly and receive a lower interest rate on the loan.
A poor credit score will have the opposite effect. You’ll find it more difficult to get approved for refinancing. The few lenders that do approve will quote a higher interest rate to reduce their risk.
Your debt to income ratio is the other factor that lenders will look into to determine your eligibility for refinancing. Debt to ratio calculates how much you spend towards ongoing debts per month compared to how much you earn per month. A high number means that your income is barely sufficient to cover your debt plus other daily expenses. This makes you a high risk borrower with a lower likelihood of getting approved.
If your credit score is bad, the easiest way to get approved is with a creditworthy cosigner. When you apply with a cosigner, the lender will use the cosigner’s credit score to determine your eligibility for refinancing. Your approval as well as the interest rate on the refinanced loan will depend on your cosigner’s credit history.
Before you choose this option, you must understand what it involves. When somebody agrees to cosign your loan, they are in fact taking on the responsibility of the loan. If you miss payments, your cosigner will have to make good on the payments. When you miss payments, it also affects their credit history negatively.
If you’re lucky enough to get a cosigner, think of it as a new lease on your finances. Stay committed to improving your credit score and lowering your debt to income ratio. When your financial circumstances improve, consider refinancing again. This time do it on your own merit so you can release your cosigner from their commitment.
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