Private lenders do not offer a standard interest rate to all borrowers. When you apply for refinancing, the lender will give you a customized interest rate based on your financial circumstances. If you’re a low risk borrower, you’ll qualify for a lower interest rate. High risk borrowers are quoted higher rates.
To determine whether you are high or low risk, lenders will take these factors into consideration:
Debt-to-income ratio is the percentage of your monthly income that you use to pay your monthly debt. In this case, your debt refers to recurring payments that you cannot cancel or reduce. This includes rent, credit cards, mortgage, student loans, personal loans, auto loans, and any other outstanding debt. It also includes alimony and child support. Debt in this case doesn’t include those expenses that you can cut back on or cancel at any time such as internet, cable, or certain utilities.
To calculate your debt-to-income ratio:
For example if your total monthly debt is $1,950 and your monthly income is $4,000, your debt-to-income ratio would be calculated as: $1,950/4,000 = 0.48 or 48 percent.
A high debt-to-income ratio means a major portion of your monthly earnings is consumed by your debt. This leaves little left in your budget to cover other outgoings such as utilities, groceries, and fuel, which are not included in the ratio.
According to the Federal Reserve, a debt-to-income or DTI ratio of 40% or more is an indication of financial stress. If your debt-to-income ratio is above 40%, you will find it difficult to get approved for refinancing. Even if you do get approved, be prepared to pay a much higher interest rate.
A low DTI ratio of 20% or less means your monthly income is high enough to cover all outgoings easily with money to spare. It also means you are more likely to make all loan payments on time, which is a relief to lenders. You will have no problem getting approved for refinancing and at a much lower interest rate too.
Getting a credit-worthy cosigner can help for refinancing at a lower rate. Meanwhile, it’s always advisable to take steps to lower your debt-to-ratio. You can do this by lowering your debt or looking for ways to increase your income. This will take some time and effort but the benefits are worth it in the long run.
We hoped you enjoyed this article! Remember, you can compare your personalized rates with our lending partners and potentially lower your monthly student loan payments and save money.