Consolidating or refinancing student loans is good financial move if it improves your financial health. A well-informed decision is critical to this process or else the risk could become trouble down the road. Before entering into consolidation or refinancing, ask the important questions listed below.
1. Why am I refinancing?
The stress of student loan debt can rush people into making a poor decision on repayments today and lead to a hazardous future of financial woes. Many times debtors will choose to refinance a student loan for the wrong reasons. Identify the pros and cons immediately before taking action.
Luckily, there are good reasons to refinance student loans these days. There are so many helpful and available avenues for personal financial reorganization. Startup companies dealing with refinancing or consolidation are competitive and eager to soothe student debt woes. Programs are available for almost any part of the student loan repayment process. The kaleidoscope of options can bring tremendous financial relief.
2. What are the strengths and weaknesses of the lender?
What is the primary focus of the pitch from the lender? A large bank like Wells Fargo, focuses on issuing new student loans, where as a startup companies like SoFi, focus on community based loans. Their costs are significantly lower than a bank because applications are online. Look into what the lender offers in ways like temporary repayment reprieves, mentorship, and little extras that could go a long way in helping.
3. What are the rates?
Ultimately, a loan rate is reflection of the borrower’s financial health and credit. Any of these companies are happy to pay a loan off, but the bottom line is it has to be approved. Comparing rates between lenders can be frustrating. Variable rate loans begin as a lower rate, but the risk is still there that the rates will increase over time. Fixed income rates are less risky. Rates will vary depending on the length of repayment; a shorter term loan gets a lower rate. It is worth the time in research to compare what lenders rates are, and what other options are available. Federal loan borrowers looking for a better rate by taking their loans to a private debt need to know they may be giving up certain federal protections like deferment and loan forgiveness programs.
4. What is the life term of the refinanced loan?
The term is the expected amount of years to pay off the loan. Most banks offer 5, 10, 15, and 20 year periods for repaying a loan. The shorter the term the least amount of interest; this is pertinent because interest on a long term loan accrue so fast. Keep in mind how much you can afford to pay in the present. A 5 year term will have higher monthly payments, but the interest won’t get out of hand and the loan won’t become unmanageable.
5. What are the repayment terms?
Borrowers looking for an upper hand in student loan debt need to know exact terms of their loans. For example, what fees will occur should a payment be missed. What kind of reduction exists for automatic payment withdrawals? Some companies offer a .25% interest rate reduction for this. It is important to know what is attached to the loans, and exactly when payment is due.
6. Is a cosigner needed, and does the lender offer a cosigner release?
Getting a cosigner can be a pretty big deal, so if a company has a cosigner release available after a set amount of on-time payments are made, this is a huge plus. A bank may require a cosigner if income or credit score are too low and to insure the loan in case of default.
7. What type of customer service and support does the lender provide?
This may seem minor, but everyone knows how awful it is to try and accomplish something when dealing with poor customer service. Some companies’ customer service can even behave threatening and hostile. Borrowers need to observe how the bank treats people, ask about support systems.
8. Is there an origination fee?
In the competitive arena of student loan consolidation and refinancing, some companies nix the origination fee. Other lending institutions will charge a student loan origination fee up to 2% of the total amount of loan. The fee is usually added to the loan amount due and not in upfront amounts.
9. Are both federal and private student loans eligible for refinancing?
Some borrowers want their loans bundled together, and this is good sense if a lower interest rate is assigned. The down side is losing the alternative repayment plans and protects associated with the federal government loan program.
10. What are the requirements for obtaining the loan?
Most people unfamiliar with lending institutions have little knowledge of what makes a person eligible for a loan. Every financial company has a different set of guidelines. The lenders will look at credit score, salary, and debt-to income ratios.
