Refinancing is kind of like leveling up. After months or even years of working hard to become debt-free, you then gain access to a higher tier of borrowing - better terms, a lower interest rate or a smaller monthly payment. Many people have misconceptions about student loan refinancing, however, which keep them from taking advantage of the benefits that student loan refinancing has to offer
If you're new to borrowing, it's easy to get scared of changing anything about your loan repayment process - even if that means losing out on the money that refinancing can save you. Here are some of the most common student loan refinancing myths - and what you need to know instead.
Refinancing Student Loans Takes Too Long
Don't fall prey to the misconception that student loan refinancing is a lengthy, tedious process. In fact, refinancing student loans is usually very straightforward. You fill out an application and wait a couple of days for the lender to run your credit report and verify your personal information. Once that’s been completed, you’ll be presented with the refinance offers you qualify for.
The total length of time from beginning to end should take a couple of weeks. This also depends on how quickly you respond to questions from the lender and provide any additional forms or information they request.
Student Loan Refinancing Has Expensive Upfront Costs
Unlike mortgage refinancing, student loan refinancing has no upfront costs like application or origination fees. That’s also why there’s no downside to applying for a student loan refinancing multiple times.
Plus, most lenders don’t charge a prepayment penalty, which is a fee for repaying the loan ahead of schedule. The only fee you’ll pay is the stated interest rate. You may owe a late fee if you make a payment after the due date, but that can be avoided if you set up automatic payments.
You Need a High Income to Refinance Student Loans
While some lenders require that borrowers have a high income to qualify for student loan refinancing, others are more lenient. All lenders, however, care about the debt-to-income (DTI) ratio, which is your monthly debt payments divided by your gross income. Most lenders want a DTI percentage below 50%.
To calculate your DTI, add up your monthly debt payments including mortgage, car loan, personal loan, credit card payment and any other loans. Include a rent payment if you don't own your property. Then, divide that total figure by your gross or pre-tax monthly income.
If your DTI is below 50%, then you’re likely a good student loan refinancing candidate. If it’s higher, then you need to increase your income, decrease your monthly housing payment or pay down some of your debts
You Need a Perfect Credit Score to Refinance Student Loans
Another misconception about student loan refinancing is that you need an excellent credit score
to qualify, but lenders often accept borrowers with credit scores as low as 660. This is great news for young borrowers who haven’t built a strong credit history yet, or who ran up some credit card debt in college.
What may hurt your chances of being approved are any recent late payments, bankruptcies, defaults, liens or recent applications for other loans or lines of credit. Before applying to refinance your student loans, check your official credit report at AnnualCreditReport.com
About one in five people have a mistake on their credit report
, which can lead to an application being denied. Look at your credit report from all three credit bureaus - Experian, Equifax and TransUnion - and make sure you recognize all the accounts.
If you notice a mistake, file a dispute directly with each of the credit bureaus. It may take a few weeks to have it removed from your credit report. Make sure to follow up and verify that it’s been deleted.
You can check your credit score for free through a bank or credit card provider, or a service like Credit Karma
. If your score is 660 or higher, you can feel free to apply for student loan refinancing.
You can increase your shot of being approved by applying with a cosigner
. A co-signer is someone who agrees to assume legal liability for your debt if you stop making payments and default. The loan will also show up on the cosigner’s credit report.
Even if you can be approved to refinance by yourself, you may receive lower interest rates if you apply with a cosigner.
You Can Only Refinance Once
A common misconception is that you have only one opportunity to refinance your student loans. In reality, however, there’s no limit on how many times you can refinance. Many choose to refinance every time the Federal Reserve decreases interest rates
because they can get a better deal on their student loans.
The only thing that might affect how often you can refinance is your credit score. If your credit dips below a certain threshold, then a lender may not approve your application. Also, you may be denied if you lose your job or your income drastically plummets.
You Refinance All Your Student Loans
Many borrowers have a mix of federal and private student loans and assume they have to refinance all those loans at the same time.
But borrowers can choose to refinance the loans they want. They can keep their federal loans
as they are and only refinance their private loans. If they have a private loan with a low interest rate and one with a high interest rate, they can choose to only refinance the latter.
In some cases, borrowers may have a better chance of being approved if they only refinance some of their loans instead of all of them.
Student Loan Refinancing is a Confusing Process
When you apply to refinance with ELFI, you’ll be matched to a member of the Personal Loan Advisor team. Every time you call ELFI, you can speak to that same person. This minimizes the confusion and frustration involved with the refinancing process.
As of 10/19/2020, ELFI has a 4.9 rating on Trustpilot with more than 1,200 reviews. More than 90% of those are five-star reviews. ELFI also has an A+ rating from the Better Business Bureau.
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