Three Questions You Must Ask Yourself Before Refinancing Your Student Loan
Refinancing student loan debts has slowly and gradually become popular among today’s generation, and it seems to be a smart way if you want to save money. Lenders often assure you of the fact that you would be saving $20,000 or even more, and that itself is quite a temptation for you to apply. But, before you take the leap, remember that refinancing a student loan is actually not everybody’s cup of tea. So, before you sign up, ensure that you have answers to all the three questions below.
Can You Afford Your Monthly Payment?
In case you are unable to afford your payments on a monthly basis, you are quite unlikely to refinance your debts as far as your student loan is concerned. Lenders value people who have a high credit score and an excellent cash flow. Refinancing your debts is an outstanding way for people who want their interest rates to decrease to escape from the burden of a debt much quicker. Mostly, people will sign on the dotted line just to make themselves free of their debts. If you are having a tough time shelling out your monthly payments and carrying the burden of a federal loan, you can opt for a repayment plan which is income-driven. These types of plans consider a percentage of your total income in a particular month to calculate your monthly payment, which is approximately around 10% to 20%. If your monthly income is on the lower side, your monthly payment will automatically be less. After 20 to 25 years, your residual debt has high chances of being forgiven, too. Now, that’s indeed an added benefit, isn’t it?
Will You Qualify?
As discussed before, lenders opt for borrowers who have a high credit score. Though the criteria may vary from lender to lender, a few important aspects such as credit score, income and employment, and debt-to-income ratio are considered. When you talk about credit score, you stand a high chance of getting an approval if your score is more than 700. Keep in mind that your missed payments, your collection items, your judgments, and your defaults would all have negative impacts on your credit score when it undergoes an assessment, and you would be in for a hard time if you desire to get an approval for your loan.
Now, if you consider the aspects of income and employment, know that most lenders will give a considerable amount of effort to make sure that you have adequate income from a full-time employment. They would want to ensure that you won’t have to struggle to shell out payments in the future. In addition to that comes the debt-to-income ratio factor. Lenders would definitely have a look at that, and the lower the ratio, the better the prospects of a refinancing.
Do You Have A Federal Loan?
If you have a federal loan, it will be quite difficult for you to make a decision. A federal loan is associated with a payment protection plan that is completely income-driven. Suppose, if you lose your job, the payment that you need to make on a monthly basis could get down to $0 a month. If there is a sudden cut down on your salary, your monthly payments have higher chances of getting reduced. And after some time that you spend on this particular payment program, your debt could also be forgiven. This federal plan is somewhat similar to an insurance policy. If you are quite sure of the fact that you are able to shell out payments during the loan’s term, the savings that you make of a reduced interest rate might just prove worthwhile. You gain in confidence since the term is shorter and you have an emergency fund. If you have the fear of losing your job or having less stability in your monthly income, it would be better for you to stick to the insurance that you receive along with a federal loan rather than opting to refinance.
Choose what seems best. If you want to seek out the best possible option in order to refinance your student loan, you can get access to various sites on the Internet that will show you a complete picture of how to go about the entire process. But, just in case you don’t have an excellent credit score or not confident enough to make monthly payments, federal loans might be the best option that you can avail. Choose wisely.
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