Refinancing student loans? How to become a credit-worthy borrower.
If you have finished an undergraduate or graduate program and are looking to refinance one or multiple loans, there are ways you can become a great prospect for a great loan.
Margaret Doherty (l.) and her daughter Haleigh Doherty (second from l.), speak to a financial aid representative during a visit to Saint Michael's College in Colchester, Vermont.
Ann Hermes / Staff
In the aftermath of Super Bowl 51 and its litany of in-game commercials, SoFi鈥檚 鈥淕reat loans for great people鈥� campaign may have been lost in the shuffle. The 30-second ad 鈥� find it on YouTube 鈥� essentially demonstrated how聽聽like SoFi draw a distinction between prospective borrowers, from creditworthy (or 鈥済reat鈥�) to, well, not so much.
The distinction isn鈥檛 so simple for聽聽recipients. More than half of the approximate nine million borrowers, for example, are under 25 and not yet in the midst of their careers, according to聽. If you鈥檙e among those who have finished an undergraduate or graduate program and are looking to refinance one or multiple loans, there are ways you can become 鈥済reat鈥� prospects too.
Credit Score and Report
Typically, private lenders look for prospective borrowers who have credit scores of 750-plus. Lower scores can be a result of a short or (lengthy but) limited credit history or, plainly put, a poor one. (According to Experian, one of three credit score providers, negative information on your report, such as late payments, can last seven to 10 years, unless removed automatically as mandated by the Fair Credit Reporting Act.) Paying off any current credit card debt should also help your score.
But more than your loan or credit-card history can now potentially affect your creditworthiness, especially if you haven鈥檛 enough history yet to actually have a credit score. New services are making available to potential lenders your聽聽in paying such obligations as utility bills. To get your score on the rise, keeping accounts under your name 鈥� whether they鈥檙e for electricity or your cell phone 鈥� up to date is a wise idea.
In addition, try to limit the number of inquiries about your credit profile you initiate. SoFi and its peers will need to run a 鈥渟oft鈥� check on your history to estimate your new, refinanced loan鈥檚 interest rates, but a potentially damaging 鈥渉ard鈥� check would be necessary for these companies to deliver specific loan terms. (FICO clarifies on its website: 鈥淔or many people, one additional credit inquiry, voluntary and initiated by an application for credit, may not affect their FICO score at all. For others, one additional inquiry would take less than 5 points off their FICO score.鈥�)
Find (or Maintain) Employment
By increasing your credit score, you鈥檝e probably covered some of聽聽using, ideally, your hourly or annual pay. Your debt-to-income ratio, a second key factor for private lenders looking for safe bets, can obviously be helped my finding or maintaining a job. Proof of employment (or a letter of future employment), which lenders seek in refinancers鈥� applications, will make their banks more comfortable in lending to you. You may also be asked to submit recent pay stubs or tax documents.
Keep in mind that if you鈥檙e currently out of work 鈥� or if your job situation is tenuous 鈥� private lenders such as SoFi competitor CommonBond offer your support, training and network programs to help you find work. After all, steady income equals steady loan payments, and your new lender will be as motivated as you are to avoid defaulting.
Identify a Co-Signer and Apply
Aside from a good credit score and a regular paycheck, you can make your borrower profile more attractive by recruiting a co-signer. A vouching family member or friend (who also has good credit and a history of earning) can help you and your lender get the best possible terms from the bank. It鈥檚 best to compare these terms side by side. ValuePenguin analysts recommend auditioning at least three refinancing lenders鈥� APRs and repayment flexibility to choose the best option for you.
After becoming a 鈥済reat鈥� candidate, your potentially 鈥済reat鈥� interest rate will be determined on other factors, such as the length of your loan and whether you choose a variable or fixed rate. The lenders themselves advise you to shop around for rates within one month to make the lowest possible impact on your credit score.
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