second refinance benefits

Refinancing to Lower Interest Rates 1% Can Mean Big Savings

Michelle Blog, Student Loans 0 Comments

Editor’s Note: Our contributor Michelle shares her experiences refinancing her SoFi loan with a new lender.  For Michelle, this is the second refinance of her student loan.

Refinancing is often touted as a highly cost-effective option for students with private student loans. I can attest to the validity of this statement, given that I have personally refinanced such loans on two occasions. In this article, I want to share with you my most recent experience.

Frustrated with having to pay over $300 per month in interest on my SoFi loan (which had an interest rate of 6.99%), I eventually decided to refinance the loan with two reputable lenders: LendKey (with whom I conducted business with in the past) and Earnest.

Note from the Sherpa: Checking rates with multiple lenders is good… Two is a start, but checking with 4 or 5 refinance companies could result in even more savings.

1% Makes a Big Difference

While Earnest declined my application, LendKey granted me a welcoming approval and a greatly reduced interest rate down to 5.95%. That 1.04% difference—from 6.99% to 5.95%–makes a world of difference as it relates to saving on daily interest and reducing the principal balance. All of this translates to paying off the loan much quicker than anticipated. The refinance also lowered my required monthly payment from $608.52 to $543.52. However, I intend to pay at least $600 per month, which is much more than the required $543.52. The extra $57 will certainly help to accelerate repayment and shave more months off the life of the loan.

Finding Additional Savings from a Second Refinance

Like many lenders, LendKey offers customers a 0.25% interest rate reduction for having their monthly payments automatically deducted from a designated checking account. In my case, that would further reduce my interest rate from 5.95% to 5.70%. Needless to say, I applied for this feature as soon as I could. To put the potential savings generated from automatic debit into perspective, consider the equation used to calculate daily interest:

Daily Interest = (Current Principal Balance X Interest Rate) / 365 Days

With a current principal balance of $63,567, an interest rate of 5.95% (or 0.0595), and 365 days in a non-leap year, I will potentially pay $10.33 in interest per day. However, when the interest rate is reduced to 5.70% (or 0.0570), I am paying $9.93. While the difference between these amounts is not much ($0.40), consider the potential savings in the context of a month ($12.00) or a year ($144). As an aside, the interest rate reduction also reduces my monthly payment from $543.52 to $535.73.

Opting for the Fixed Rate

I also wanted to mention that I decided upon a fixed interest rate option as opposed to the riskier (albeit more cost-effective) variable rate option. I figured that, given my meager income and the fact that I had a large principal balance that could not be paid in one to two years, a fixed rate was much more appropriate.

In any event, below are some general features of the new loan:

Private Student Loan 2
Lender: LendKey
Interest Rate: 5.95% (5.70% with the 0.25% interest rate reduction incentive)
Current Balance: $63,567 (as of April 27, 2018)
Repayment Length: 15 Years

Final Thoughts – Refinancing Again?

I feel like a huge weight has been lifted off my shoulders. While my debt has merely been transferred, the fact that I was able to receive a significantly lower interest rate than what I had with the original lender is a positive step in my journey towards paying my total student loan debt (approximately $96,600) in four years.

One of the positive aspects about refinancing is that there is no limit on how many times it can be done. That being said, the interest rates I now have (5.70% and 6.00%) are decent but, with time and an ever-increasing credit score, I can (and will attempt to) receive even lower rates.

My next course of action is to refinance my second private student loan—which is with Navient and currently stands at 6.00%—early next year. Furthermore, I want to refinance this loan with LendKey so that I have the convenience of having both of my loans with the same lender. Wish me luck!

[Further Reading: LendKey Refinancing Review – Pros and Cons]