Refinance. You have probably heard this word many of times within the financial world. You can refinance your student loans, refinance your mortgage, refinance your auto loan, and more.
It is important that you weigh all of your options before you choose one to go with because you may make a mistake if you do not consider everything. Refinancing is a great option for some students and it can provide them with some financial relief by reworking their interest rate and their monthly payment amount.
If you are considering refinancing your student loans, there are some times when you SHOULD do it. Below, we will go over the different times you need to consider refinancing as an option.
1. You Have Good Income and Low Debt
When a lender considers you for a refinancing program, one of the first things they look at is your debt-to-income ratio. Although you are refinancing your STUDENT loans, ALL loans are looked at when it comes to your debt.
Therefore, if you have an outstanding student loan debt of $50,000, a car loan for $30,000, and then credit card debt for $10,000, your total outstanding debt is $90,000. If you are only making $40,000 at you job, then your debt is more than double that of your yearly income and it is unlikely that you will be approved for refinancing. Now, if you only owe the $15,000 in student loan debt and you make $40,000 or $50,000 per year in income, then you may be approved.
It only makes sense to apply for a refinancing plan when you have a good, steady income and when your debt is relatively low compared to your income.
2. You Have a Good Credit Score
Another factor that lenders look at when you apply for refinancing is your credit score. Yes, the dreaded credit score. If you do NOT have a good score or you do NOT have a co-signer with a good credit score, don’t bother applying.
It only makes sense to apply for this program when you or your co-signer has the credit to do so. In fact, most lenders want you to have a high credit score, but they will generally accept applications when a person has a credit score of 690 to 850.
If you are fresh out of college, you may find it difficult to obtain such a good credit score and this can leave you bummed. In addition, it is not always easy to find someone who wants to cosign for you because, if you do in fact stop paying, the co-signer is then responsible for the debt.
3. You Have a High Interest Rate
If your student loans carry a high interest rate of six percent or higher, it makes sense for you to refinance your loans. When you are approved for a refinancing plan, your interest rate on the loan will be lowered and you will save yourself hundreds of dollars per month.
In fact, many students who refinance their student loans find that they qualify for a low interest rate of three or four percent. This is a big difference and will be reflected in the amount of money you pay per month.
Apply for Refinancing
If you are interested in refinancing your student loans, it is always smart to shop around before choosing a lender. There are even some tools out there that let you compare student loan refinancing quotes from lenders before applying. It is important that you fill out all of the necessary paperwork and provide all relevant documents to prove your income and more when you actually apply.
If you are approved for the refinancing program, you and your new lender will discuss the new payment terms, length of the loan, and the interest rate. You can choose to accept or decline the changes.
If you do accept the changes, make sure that you continue to pay your normal monthly payment until you receive notice that you can stop making the old payment and start making the new payment. If you fail to make a payment while your refinancing application is still processing, you may hurt your chances of getting approved.