Today, most students graduating from college find themselves burdened by significant debt. According to a recent study, the average student has around $30,000 in debt. If you’ve just left college, this amount is huge considering that your career is at its infant stages.
The situation is much worse for students who can’t enter into their specific career field leaving them with limited options to service the student loan accrued. Unlike in the past when refinancing was mainly used towards mortgage and auto-loans, today graduates can easily refinance student loans. Besides reducing the interest rates significantly, this method can also be effective in lowering the monthly payments.
What is refinancing?
Basically, refinancing is when a lender pays off your current debt at once and they give you a new loan. Typically, the new loan comes with better interest rates. This leads to significant savings or a more favorable payment schedule. For instance, a student loan can have interest rates of about 12%. But after refinancing, it can go down to even 3%. However, the interest rates are greatly determined by your qualifications as well as the lender.
When you get a refinancing deal with lower interests, it means the amounts added to the loan principal per month. But if you are getting your loan refinanced so that you can get a longer repayment period, it means you’ll end up paying more money compared to what you’d have paid if the duration was shorter.
Are you eligible?
Despite the fact that this refinancing is a brilliant move, not everyone will qualify to make the move. Most lenders are keen to look at your employment status as well as your income. In addition, the debt should be coming from recognized universities and colleges. At the same time, you’ll come across just right loans lenders who only approve graduates from specific.
Most lenders are impressed by graduates who have a good credit history without past missed payments. This assures the lender that you are reliable and they’ll quickly approve your loan if you have a stable income. While most lenders will approve your application if your credit score is over 600, you’d get a better deal in terms of interest when your credit score is higher.
However, you may still qualify even when your earnings or credit score are above average. All you need to do is have a co-signer who is credit worthy. You can ask one of your friends or family member to co-sign the loan with you.
Requirements for refinancing
After evaluating your situation, it’s likely that you’ll decide in favor of refinancing. But before you go out there to find a lender, you need to prepare a few things in advance.
Have a recent copy of your tax returns to prove your income as well as total liabilities.
Check your credit score at the moment to know how much you’ll be paying in interests. If you have no idea what your score is, you can easily check on Experian or Transunion.
If it is below average, you need to have a co-signer in advance. Find a friend or relative who is willing to co-sign your loan.
What are the loan terms?
When you start hunting for the most appropriate refinancing deal, it’s obvious you’ll come across several offers. Different lenders have varied interest rates as well as repayment periods. Depending on your preferences, you can choose to repay the loan in five, ten or even twenty years.
Ideally, paying the borrowed money in a short time is a wise decision but it is not always a viable financial option. Therefore, you can choose to clear the loan over an extended period, which means you’ll have a lighter monthly burden. If your earnings grow when you’re still servicing your loan, you can decide to increase the payment amount to clear the debt sooner.
Most lenders will also give you the option to choose between a variable and a fixed interest rate. Basically, variable interest rates can go as low as 2%. However, they tend to fluctuate as time goes and makes budgeting quite a challenge. While a fixed interest rate seems higher, it stays the same over the entire lifetime of the loan. This makes budgeting easier since you can predict how much you’ll be paying.
Making a decision to refinance your student loan can be a strategic move towards saving a significant amount of money. However, the decision requires substantial forethought as well as financial planning if you want to get all the benefits.
But before you make a decision, evaluate all the benefits of the student loan. Normally, federal loans come with attractive benefits which are not available with other sources of credit and you’d lose them if you refinance the loan.
If you are sure your financial status makes refinancing a viable option, you need to spend some time creating a specific plan that will help you to spend the money wisely.