Student Loan Consolidation with Less than Perfect Credit

Michael Lux Consolidation, Lower Payments, Student Loan Blog, Student Loans 0 Comments

So you have decided to consolidate your student loans with a private company?  It is probably a smart move because the interest rates you qualify for now are likely lower than what they were when you were a student.  In fact, interest rates with many student loan consolidation companies are at all time lows, with numbers below 2%.

Unfortunately, not everyone can get those low interest rates.  For starters, they typically apply to shorter term loans.  If you are looking for 15 years or more to repay your loans, that 2% number may be a fairy tale.  Things get even worse if your credit isn’t perfect or if you are not making a large enough salary to justify your debt.  If you can just barely afford the minimum payment on your debt, odds are you will have a major struggle consolidating on the private market.

[Sherpa Tip: Be very careful about consolidating your federal loans with a private company.  In some instances it can be a savvy move, but be certain that you are willing to give up the federal “perks” that come with all federal loans.]

Where do I go?

There isn’t one answer to the student loan consolidation question.  In fact, with a huge list of companies offering student loan consolidation, one of the worst things you can do is just apply with one company.  There are a couple reasons shopping around makes sense.

One thing that many people unreasonably fear is damaging their credit score by shopping around.  People seem to realize that many credit inquiries is a bad thing, but they don’t fully understand the consequences.  The damage done to your credit score by having a company look at your credit for lending purposes is minimal, about 5 points.  However, this decrease in credit only happens with the first company that checks.  If you have four or five more companies look at your credit in a short period of time, it is considered shopping around and does not hurt your score.

Another reason that shopping around helps is that each company looks at your credit report differently.  They all have their own secret formulas for deciding who gets approved and at what interest rate.  Some lenders may weigh your location more favorably than others.  Some lenders may put a more weight on payment history over debt to income ratio.  Others might weigh certain debts differently… i.e. treating a mortgage more favorably than credit card debt.  Because these approval formulas are a major unknown, it is hard to know what lender is best for what individual.  If your credit score has a few warts, looking around is especially important, because some lenders will be more forgiving than others.

Typically, we recommend starting your student loan consolidation shopping with SoFi, CommonBond, and Laurel Road.  These three companies offer the best interest rates in an increasingly competitive industry.  Unfortunately, they do not necessarily have the highest approval rates.  The one company that is probably the best for imperfect credit is LendKey.  The advantage with LendKey is that they will work with local not-for-profit credit unions and banks to find a loan.  Their interest rates are still very competitive, but the approval rates are also much higher.

A couple tricks to tip the scales in your favor

If you are thinking about applying, there are a couple of things you can do to give yourself the best shot at an approval.

Take a look at your credit report.  If you notice any errors mistakes, be sure to get them addressed before moving forward.  A delinquent account, or even a late payment, can derail an application.  If you see something that shouldn’t be there, be certain it is corrected before sending out applications.

If you are on the brink of paying off some debt, get it paid off before applying.  Companies look at how much money you make each month and compare it to how much debt you already owe each month.  If you have any debt you can easily knock out, from an existing student loan to a car payment or a credit card, do that first.  Having one less monthly bill means you have more to spend on your consolidated student loan… aka better chances for approval.

Keep your credit card balances low.  Lenders will look at how much you owe compared to how much you are able to borrow.  The number they look at is your monthly statement.  Even if you are paying your credit card off in full each month, a larger balance can hurt you chances.  Your target range should be between 0 and 9% credit utilization.  That means if you have a $5,000 credit limit, try to keep your balance at the end of each month below $500.  This does not mean you can’t use your credit card as you normally would.  Just be sure to make a payment shortly before your billing cycle ends.  You want your statement balance to be as low as possible.

Final Thought

Your credit and the student loan consolidation marketplace are both very fluid things.  If things don’t work out now, it doesn’t mean that you won’t have success a year from now.  The key is to understand that factors that play a part and to do what you can reasonably do to get the numbers in your favor.


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