Mailbag: Conolidation Repayment Length and Approval Chances

Michael Lux Mailbag, Student Loan Blog, Student Loans 0 Comments

Today’s mailbag question comes from Laura who is having problems getting approved for student loan consolidation.  She is curious about the repayment length selected and how it could impact her chances for approval.  If you have a question for the Sherpa, feel free to ask us!

Laura writes:


I am almost 1 year out of college and I have about $40,000 in private student loans (an additional $30,000 federal loans and $20,000 parent plus but those are a different topic). I have been trying to get them refinanced for a few months now and I really need advice.

I have a job that I started in September that pays $30,000 and a pretty good credit score (ranges between 710 and 745 depending on which one is pulled). The biggest problem is that the interest rates on my private loans range between 8.5 and 10.5% meaning basically anything I’m paying off is just getting added in interest the next month. I feel like my payments are making no headway into paying off the debt.

I pulled soft credit checks from a few lenders and was straight up denied, but my confusion is that a few lenders (Lendkey, Sofi, Purefy) gave me refinancing options or even pre approved me, but when I then applied with a hard check I was denied. I assumed an approved soft credit check was a good sign. Is that not so? I can’t just keep applying with hard checks to lenders that give me hope because that will be bad for my credit score.

One thing I was wondering if it would make a difference….when I am given multiple options from the soft check, say 8 years at 4.8% with a higher monthly payment or 15 years at 6% with a lower monthly payment (I just made up those numbers but I was given options following that pattern), I choose the lower interest rate because even though the payment is harder to make, it means I save a lot more in the long run. Is that a bad idea? Would I more likely be approved if I choose the little bit worse offer with the higher interest rate?

I hope all my questions made sense and didn’t ramble on too much. I honestly just didn’t know where to turn to or who to ask and I found you online so I’m hoping you can help. My parents are great and have been helping me with my monthly payments while they are currently ridiculously high, but they don’t know the ins and outs of refinancing either to be able to give me solid advice.

Thank you in advance. I’m really looking forward to what you have to say.



Repayment Length and Getting Approval

Laura presents a very interesting question.  Would she be more likely to get approved for a short loan or a longer loan when she applies for student loan consolidation?

Lenders notoriously keep their exact formulas for determining approvals and denials a secret.  In order to get to the bottom of this we will have to look at things from the student loan companies perspective and make a few educated guesses.

Would a lender prefer long repayment or a short term?

If you have taken a look at student loan interest rates, you know that the student loan consolidation companies offer better rates on the short-term loans.  The longer it takes to repay a loan, the higher the interest rate for the borrower.

Does this mean that lenders prefer shorter repayment lengths and choose to offer low-interest loans to encourage this sort of borrowing?  The answer is probably not.  If lenders have a long loan with a high interest rate, it will be far more profitable than a short loan with a low rate.  Ultimately, the difference in interest rates is the result of the risk associated with the loan.  A five year loan is much less risky than a 20 year loan.  A lot can happen in those extra 15 years.  Thus, the rate must be higher.

Which length is best for approval?

The two main factors in any student loan consolidation application are credit score and debt-to-income ratio.  No matter what loan repayment length you select, your credit score will be the same.  The variable that changes will be your debt-to-income ratio.

When a lender looks at your debt-to-income ratio, they want to see that you will be able to afford the monthly payments on your new loan.  If your new loan or existing debt would eat up too much of your monthly income, they will deny your application.

Choosing a longer repayment term will help your debt-to-income ratio.  A lower payment means your monthly income can go further.  Pick a high payment (meaning a short-term loan) and it eats up a much bigger portion of your monthly income.

It is for this reason that picking the longer repayment plan likely helps your chances of getting approved.

The Big Picture

Ultimately, we are talking about changing one small variable in a process that has many different variables.  Laura’s denials may have nothing to do with the repayment plan that she selected.  When the time comes to select a repayment plan, it makes the most sense to just pick the plan that you really want.  If you receive several rejections, it might be worth tweaking the repayment length selected to see if it makes a difference.

It is important to remember that student loan lenders are smart and the last thing they want to do is reject a customer that they want to work with.  A lender might reject someone for a short-term loan, but if they will willing to offer a long-term loan, a smart lender would share that information with a potential customer as well.

In short, the length selected may have an impact on a denial or approval, but other factors are much more likely to contribute.  If your application has been denied, be sure to check out our article on turning an student loan consolidation rejection into an acceptance.

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