Over the years, I’ve helped many borrowers refinance their student loans.
For borrowers with good credit and a solid income, the refinance process is usually quite easy. Unfortunately, the simplicity of the process can lead to mistakes.
The following few tips can serve as a checklist to help ensure that you don’t make any mistakes when refinancing.
The Most Important Refinance Tip: Shop Around
If you buy a car, shopping around is pretty easy, and the potential benefits are pretty obvious.
Shopping around for student loan refinancing scares some borrowers. Many fear that multiple credit checks will hurt their credit scores.
Fortunately, shopping around doesn’t impact credit scores. The first hard credit pull counts as in inquiry, but additional rate checks in the same 30-day window have no impact on credit scores. This allows borrowers to shop for the lowest interest rate without negative consequences.
Shopping around is especially important for student loans because the interest rates that a lender advertises may not be the rate that lenders actually offer. Additionally, each lender uses its own criteria for evaluating applicants. Because these formulas are closely guarded secrets, it is impossible to say which lender will offer the best rate to any specific borrower.
Sherpa Tip: The borrower’s application isn’t the only factor that can impact interest rates.
If a lender is low on cash, they may approve fewer borrowers or charge higher interest rates. Likewise, lenders with tons of available capital may offer excellent rates to a wide range of borrowers.
The student loan refinance rankings incorporate reader feedback to create a list of lenders most likely to approve borrowers at an excellent interest rate.
Tweak Repayment Length to Find a Sweet Spot
The formulas that lenders use in determining interest rates are complicated. Sometimes these formulas produce some strange results.
Typically, rates with a longer repayment length have higher interest rates. However, I’ve seen lenders who charged the same interest rate for a 10-year loan and a 15-year loan. For a borrower, the 15-year loan is a better option because it has lower monthly payments and the same interest rate. Borrowers can always repay the loan quicker than scheduled, but the lower monthly payment provides more flexibility.
When you check rates, be sure to investigate the interest rates at different repayment lengths. In many cases, this exercise can help identify the best deal available.
Keep Other Financial Goals in Mind When You Refinance
Many borrowers treat refinancing as a hunt for the lowest possible interest rate.
Sometimes the best interest rate isn’t the best loan option.
For example, if you will be buying a house in the coming months or years, a lower monthly payment has tremendous value. Picking a loan with a longer repayment length lowers the monthly bill, which helps a borrower’s debt-to-income ratio.
If you select a 20-year loan over a 5-year loan, your interest rate will be slightly higher, but your monthly payment will be much lower. When a mortgage company looks at your credit report, they will see a lower monthly payment, and it will help you get approved for a larger home loan.
Use Historic Interest Rates to Decide Between Fixed and Variable Rate Loans
Deciding between a fixed-rate loan and a variable-rate loan is tricky.
Generally speaking, variable-rate loans have lower interest rates and the possibility that rates can go even lower. Fixed-rate loans usually start a bit higher, but there is no risk of interest rate increases.
There are several different factors to consider when deciding between a fixed or variable-rate loan, but I think history is also a helpful guide.
If interest rates are near historic lows, locking in a fixed-rate loan is probably a smart move. Conversely, if interest rates are approaching record highs, opting for a variable-rate loan makes more sense.
At the time of this article, interest rates are hovering near record lows, which means fixed-rate loans may be the best choice for many borrowers.
Essential Double Check: Think Twice About Refinancing Federal Student Loans
If you have researched refinancing, you likely have seen plenty of warnings about refinancing federal loans.
Private lenders may offer better interest rates, but they cannot compete with government perks like income-driven repayment and student loan forgiveness.
Before refinancing federal loans, be sure that you understand the benefits you are giving up and are comfortable with the consequences.
Don’t Chase Lender Bonuses
Many different lenders offer a cash bonus to borrowers who refinance their student loans.
While upfront cash is tempting, interest rates are far more critical. For example, Splash Financial is currently offering $500 to borrowers who refinance at least $50,000 worth of student loans. This bonus does not necessarily make Splash the best option. If a borrower can find a better interest rate elsewhere, they usually come out ahead in the long run.
Don’t Refinance All of Your Loans
Having all of your student loans with one lender might be convenient, but it isn’t necessary.
If you have two student loans with interest rates at 3% and 7%, and the best refinance offer is 4%, only refinance the loan at 7% interest. Very rarely will it ever make sense to refinance into a loan with a higher interest rate.
Refinance as Many Times as Needed
Borrowers can refinance as many times as they want.
There are several circumstances where a second or third refinance makes sense:
- If you start earning more money.
- If your credit score increases.
- When market conditions mean lenders are offering lower interest rates.
If you haven’t refinanced your loans in a while, it might be time to investigate the new refinance options available.