With interest rates still at very low levels, I decided to see if I could lower the interest rate on my existing auto loan. When it comes to anything related to creditworthiness, my student loans are a huge cloud casting a shadow over everything I try to do. Like millions of Americans, whenever I apply for credit, any perspective lender does a double take when they see how much student loan debt I have.
Despite my concerns, I was actually able to significantly lower my interest rate and car payments via a quick refinance. A few bits of information I picked up along the way could save you a bunch of money.
Tip #1: Most banks and creditors have no idea how to handle large amounts of student debt.
I got a shocking range of responses when I submitted my refinance applications. Some lenders offered me interest rates as low as 3% while others couldn’t even offer me a loan. I suspect this is as a direct result of my student debt. My credit score and salary both could be described as decent but not great. On paper I probably would have been a good car loan candidate for most lower interest loans.
When lenders are making a decision on whether or not to offer you a loan, they are trying to decide whether or not it is something they think you can afford. They will look at your monthly income and compare it to your current expenses according to your credit report. This is how they determine your debt-to-income ratio.
The wildcard in my debt-to-income ratio was my student loans. More specifically, many lenders were confused at how to deal with my Income Base Repayment plan payments. One lender specifically called me to discuss my student loans. He figured that I was on some sort of deferment and expected my monthly obligation to go up dramatically. I had to explain IBR and how it worked.
When you pull an individuals credit report, there is no way to determine what student loan repayment plan they are one or when the terms will be changing. Because of this, the lenders don’t know how to process this information. Some will give you the benefit of the doubt and offer a loan based upon your reported required monthly payment. Others will assume it will go up and deny your loan entirely. Finally, some will call and ask for more information.
Unlike home loans, for most new or used car loans, credit approval is an automated process (this is why many are able to provide instant approval online). From my auto refinancing experience, it appears that these automated processes vary greatly from one institution to the next.
Tip #2: Cast a wide net
There are a ton of places offering car loans. Use this to your advantage. Because you don’t know how most banks and credit unions will handle your student loans, shopping around is essential in order to get the best deal.
If you are worried about many credit inquires hurting your credit score, don’t be. As long as they are within a 45 day window, the credit scoring matrix will identify this as rate shopping, and will treat all of the inquiries as one.
I was very surprised with the results that I got on my applications. Lenders I thought I had a shot at getting a great rate from denied me completely, while lenders I had little faith in made great offers.
The other advantage of shopping around is that you force the banks to compete for your business. They may have some rate flexibility and you might be able to use one offer to get an even lower rate elsewhere.
Student loan debt is growing at a huge rate. Many financial institutions are struggling to figure out how to handle it. Because there is no “industry standard” for dealing with applicants with student loans, you will see a variety of responses. If you keep this dynamic in mind and shop around, a good rate can still be had.