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’s “Great loans for great people” campaign may have been lost in the shuffle. The 30-second ad — find it on YouTube — essentially demonstrated how online private lenders like SoFi draw a distinction between prospective borrowers, from creditworthy (or “great”) to, well, not so much.
The distinction isn’t so simple for student loan 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 ValuePenguin research. If you’re 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 “great” 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’t enough history yet to actually have a credit score. New services are making available to potential lenders your track record in paying such obligations as utility bills. To get your score on the rise, keeping accounts under your name — whether they’re for electricity or your cell phone — 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 “soft” check on your history to estimate your new, refinanced loan’s interest rates, but a potentially damaging “hard” check would be necessary for these companies to deliver specific loan terms. (FICO clarifies on its website: “For 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.”)
Find (or Maintain) Employment
By increasing your credit score, you’ve probably covered some of your debt 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’ 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’re currently out of work — or if your job situation is tenuous — 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’s best to compare these terms side by side. ValuePenguin analysts recommend auditioning at least three refinancing lenders’ APRs and repayment flexibility to choose the best option for you.
After becoming a “great” candidate, your potentially “great” 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.
This story originally appeared on ValuePenguin.