Refinancing a student loan is the process of taking out a new loan with a private lender and using it to repay an existing student loan. In case of poor credit, it can be difficult to refinance student loans through private lenders. Some lenders will charge you more, while others may completely deny your new loan application.
All lenders use different criteria to determine borrower eligibility and interest rates. Therefore, even with credit challenges, some student loan refinance options may still be available.
What credit score do I need to refinance my student loan?
As lenders often consider credit score requirements proprietary information, it is difficult to identify the exact credit score requirements for refinancing. As a rule of thumb, anything over 650 could potentially give you the best shot in qualifying.
Even if you meet the minimum requirements, you will still face higher interest rates with poor credit. You may be eligible, but the interest rate can be in double digits.
If the lender doesn’t advertise the credit score requirements, you’ll get prequalified with a small number of companies. This gives you a sense of where your credit score will be placed in terms of eligibility and interest rates.
If you have poor credit, when is a refinance worth it?
Even if you have a low credit score, you can still save money by refinancing. What should you consider to determine whether refinancing makes sense to you?
Better interest rates
Even if your credit score is low, a slight improvement could mean better interest rates than you are currently paying, as you have taken out your current loan. By qualifying with other lenders in advance, you can measure eligibility for more attractive loan terms. Many people can check the approval odds and potential refinance rates online with soft enquiries that do not affect their credit scores.
Different repayment timelines
Another potential benefit of refinancing is the ability to obtain extended repayment periods. Even if you don’t qualify for more competitive interest rates, you’ll still be able to make monthly payments more affordable as you expand your balance over the long term.
However, this approach has its drawbacks as lenders spend more time engaging you with interest. In exchange for reduced monthly payments, you can expect higher borrowing costs over time.
Lender incentives
Whether you have a federal or private student loan, you can refinance to change your lender and take advantage of special incentives and bonus offers. However, refinancing federal student loans with private lenders means losing valuable benefits, such as income-driven repayment plans and potential loan exemptions. The benefits of refinance should outweigh your costs.
Consolidate multiple loans
Refinancing is the ideal way to streamline your repayment process if you are struggling to manage your student loans. By consolidating your loan into a single refinance loan, you get a monthly payment, instead of juggling several payments and due dates. Additionally, signing up for automated payments with new lenders will help you avoid late fines, missed payments and adverse credit reports.
How to refinance a student loan with poor credit
Refinancing a student loan is a great way to save money on your educational debt. However, many private lenders need a high minimum credit score since the mid-600s to refinance student loans. If you’re worried that your score won’t reach this threshold, try these tips.
Apply in Cosigner
By choosing to add a Cosigner to your loan application, you will be entitled to refinance your student loan in the event of credit issues. Of course, Cosigner needs proper credits (or better) for this approach to work. If your Cosigner credit is sufficient, it may help you ensure lower fees and better loan terms.
On the negative side, Cosing can backfire for your loved ones as it takes risks to your credit report and score. If you are unable to pay back your refinance student loan, as promised, your Cosigner credit will suffer from late payments or defaulting your loan.
Cosigner is liable for the debt as if he were the sole borrower. Even if you always pay on time, student loans co-signed to your loved one’s credit report may make it difficult for them to borrow again in the future.
Improve your credit score
The credit score is not the only details that a lender has considered when applying for a loan. But they are certainly one of the most important factors.
It is wise to work to improve your credit score before applying for a student loan refinance. Here are some potential ways to boost your credit score:
- Please check the credit report for errors. You can request a free credit report from each credit department via weekly Creditreport.com. If you discover inaccurate information about these reports, you can compete with the appropriate credit department. Negative and inaccurate data on credit reports can damage your credit score, so you should never ignore this issue if you encounter it.
- Always pay your bills on time. Set up automated payments and schedule reminders on your smartphone to help. Payment history is worth 35% of your FICO score.
- Reduce your credit card balance. Credit usage (aka your balance to limit ratio) has a big impact on your credit score. Paying back your credit card balances can generally reduce usage and improve your credit score due to expansion.
- Add alternative credits to the report. Programs such as Experian Boost allow you to add certain types of information (such as mobile phones and utility accounts) to your credit report. If you pay these invoices regularly on time, adding them to your report may be a good fit for your score. Especially when your credit files are thin and there are very few other accounts.
I’ll shop with my lender
Whenever you need to borrow money, it’s a good idea to shop for the best deal. Comparing offers from multiple lenders can save you a significant amount of money during the life of your loan.
Some private lenders can check interest rates only through soft credit inquiries. This loan pre-approval process is fantastic as it allows you to compare multiple refinance options without potential credit score damage.
Improve cash flow
When applying for a new loan, lenders often take into account the debt-to-income ratio (DTI ratio). DTI compares monthly income earned (pre-tax) with monthly total debt payments.
Lenders hesitate to lend you more when you are borrowing too much money compared to your income. However, if you can improve your cash flow, you may be in a better position to qualify for student loan refinancing by paying off your debts and making more money.
Alternatives for refinancing student loans
Refinancing a student loan is not suitable for everyone. If your bad credit prevents you from refinancing or you can’t get a lower interest rate than you’re currently paying, an alternative approach may be the best. Some options include:
- Consolidate federal loans. Direct integrated loans combine federal student loans into new individual accounts. You can extend your repayment period and lower your monthly payments while maintaining valuable federal student loan benefits. That said, student loan consolidation doesn’t save you money because interest rates remain the same.
- I’ll lower the payment. Applying for an income-driven repayment plan is another alternative to refinancing federal student loans. If you are eligible, your new monthly payment amount will be based on a portion of your discretionary income.
Conclusion
If you have poor credit, you may have problems cutting your monthly payments to refinance your student loan. However, many lenders require a minimum credit score at a high level since the mid-600s. You may need a co-signer to apply for loans to qualify. Comparing prices to shopping, loan approval requirements can help identify different lenders.
If you can’t find an aspiring cosineer or lender that will work with your existing credit, it may be best to improve your credit score and revisit your refinance. Even if you are eligible for a refinance now, remember that doing so may not be the best financial move.
