If you need more income to cover bills and expenses, or even to put away for a rainy day, refinancing your private student loan may be a smart financial choice. Refinancing allows you to renegotiate the terms of your loan with a new lender. That new loan is then used to pay off your old debt. To help ensure you’re getting the best loan terms possible, avoid these common mistakes.
Not Researching Your Options
Refinancing student loans is an opportunity to get better interest rates, change the length of the loan and lessen the overall burden of the debt. So there’s no need to rush through the process and take the first offer you receive. Compare interest rates from various lenders, especially if rates have fallen or your credit has improved since you first negotiated the loan. Look out for additional terms and perks when talking to lenders, such as the repayment terms, career support or unemployment protection. Check out the reviews on the various lending institutions and make sure the one you go with is considered to be a respectable company within the industry.
Taking Too Long to Refinance
While you want to be thorough when researching possible lenders, taking too long to refinance your student loan can actually work against you. A credit inquiry for a student loan application is considered a hard pull, which means that a creditor checked your credit report. You don’t want numerous inquiries to occur within a short period of time or it will appear as if you are taking out quite a lot of credit, which may scare lenders away.
Limit your refinancing research and applications to a two-week window. VantageScore, a credit scoring model, allows a 14-day grace period where all hard inquiries are grouped together and considered just one credit pull. This is important because a hard inquiry can cause your credit score to drop by 10 to 20 points. So if you had five or 10 pulls over the course of a month or two, your credit score could possibly be lowered by 100 to 200 points, for example. Stick to two weeks to avoid any serious damage.
Ignoring Your Credit Score
If you don’t regularly check your credit report and score, there’s a good chance that you have no idea what your score actually is. Without knowing your score, you will not be able to negotiate with lenders and choose the best student loan refinancing option. VantageScore 3.0 ranges from 300 to 850, with a score of 760 or higher being ideal for lenders. Refinancing can be especially beneficial if your credit score has improved since first obtaining your student loan.
Would you like to see your credit score now? YES, SHOW ME MY CREDIT SCORE
Not Understanding Interest Rates
It can be tempting to take the lowest interest rate that is waved in front of you when refinancing. However, if that low rate is variable rather than fixed, the overall cost of your loan could rise significantly before it’s all paid off. Variable rates tend to start out lower than their fixed counterparts, but as the name indicates, variable rates can drastically change without any notice. Unless you expect to pay your loan off in about a year, the fixed rate could likely prove to be the most cost-efficient option.
Thinking Discounts Won’t Add Up
Many lenders offer ways for you to obtain discounts on your loan, usually about one-quarter of a percentage point. That may not sound like much, but over the course of the loan that small percentage can really add up. For example, opening a checking account at the bank from which your loan is issued can land you a slight interest rate deduction. So can signing up for auto-pay. Some lenders may even give a discount if your co-signer, if any, had a loan at the same financial institution. Any discount at all is money in your pocket and well worth inquiring about.