Most student loan borrowers can benefit from refinancing their student loans. Since it is a fairly new offering, many borrowers are not aware that with very little effort, you can lower your interest rate and get out of debt faster. Here is what you can do to get your interest rate as low as possible when refinancing your loans.
WHAT’S IN A RATE?
Credit Score – Having excellent credit is usually the largest factor that lenders consider in determining your interest rate. Traditionally, it has been measured by Fair, Issac and Company, most commonly known as FICO. Your FICO score is a number which represents the creditworthiness of a person – essentially an algorithm of your borrowing history. While there are many free services to check your credit, most lenders will pull reports from TransUnion, Equifax or Experian. Be cautious though, your credit score may differ among credit bureaus. To avoid surprises, try to check your credit with each individual bureau to obtain the most accurate FICO score. The difference in scores among bureaus may have an impact on your interest rate. Once you have an idea of your credit score, you can use our Find My Rate app to see what rate you may qualify for with Purefy without starting an application.
Debt-to-Income ratio (DTI) – We have covered this topic before, but it’s the most common reason borrowers get denied. A high DTI (perhaps surprisingly) is not always caused by student loan debt – credit card debt is usually the biggest reason someone is turned down. Paying down your credit cards before refinancing can help ensure you get approved. Develop a plan to maximize your monthly payment and pay down your debt before refinancing. You can calculate your DTI through calculators at Zillow or Bank Rate to track your progress. Most experts agree that a DTI below 36% is ideal, but as long as you can keep it below 43% you are in good shape. If you know you will be getting a raise or a promotion in the upcoming months, wait to apply until your income increases to help lower your DTI.
Cosigners – It’s important to know the interest rates you qualify for on your own before you ask someone to cosign with you. Don’t assume you will need a cosigner just because you have one on your student loans now. We have had a few cases of borrowers being denied because of their cosigner. However, if you have a cosigner, we use the higher credit score between you and your cosigner for qualification purposes. For example, if your score is 720, and your father’s score is above 800, it may be worth asking dad to cosign as you’ll be offered a more competitive rate. We have addressed the pros and cons of cosigners before, but it’s best to use a cosigner if you can’t qualify on your own or to substantially lower your interest rate.
Variable vs Fixed – Variable rates are typically lower than fixed rates, but keep in mind that variable rates are tied to a factor you can’t control – the market. If you have a shorter loan term, a variable rate can potentially save you more money than a fixed rate, but there’s certainly some risk involved. If you have a longer term, the variable rate could increase significantly over the life of the loan to the point where you are paying more than you would have paid with a fixed rate. If there is only a small difference between the rates and you’re considering a longer term, go with the fixed rate. Another benefit of a fixed rate is just as it seems – your rate is locked in and won’t increase for the life of your loan. Whether that’s 5 years or 12 years, you know what you will be paying every month until you are debt-free.
Terms and Timing –If you can afford the monthly payments, a shorter term will get you out of debt faster and save you the most money on interest cost. Our most popular term is our 8 year term, which is unique in the student loan refinancing space. Timing is probably the most difficult factor to determine because no one knows if rates are going to rise. Although we are currently in a low interest rate environment, there is not a perfect time of the year or day of the week to refinance your loans. In general, once you are ready to refinance, go ahead and apply to start saving on your student loans sooner rather than later.
Auto payment and Discounts – One of the easiest ways to lower your interest rate is to set up automatic payments. We offer a 0.25% interest rate discount just for auto drafting your payments. Lenders can offer this because it lowers the risk associated with the loan. When in the process of refinancing, ask your personal loan advisor to make sure you are getting all the discounts you qualify for. Common discounts are for advanced degrees, signing up for a checking account (if offered) and selecting auto pay. It never hurts to ask if there are any other discounts available; we are always happy to help you find the best solution.
Many student loan borrowers are responsibly paying back their loans every month without realizing that they could get out of debt faster by refinancing their student loans. Our borrowers lower their interest rate by an average of 2% and shorten their loan term an average of 3 years*. Federal loans have many benefits, but an opportunity to lower your interest rate and get out of debt faster isn’t one of them.
*Based on borrower savings from 01/01/15 – 09/30/15