Published in Borrow
Written by Kristyn Pilgrim

The Easiest Options for Refinancing Student Loans When You Have Bad Credit

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    The Easiest Options for Refinancing Student Loans When You Have Bad Credit

    Published in Borrow
    Written by Kristyn Pilgrim

    It’s tough to refinance student loans with bad credit, but there may be (emphasis on “may” be) some options available if you have a co-signer.

    Is It Possible to Refinance Student Loans With Bad Credit?

    To get the best possible interest rates and most favorable terms when refinancing your student loans, you will need to have good credit (mid to high 600s or better) and a steady income. You’ll also need a history of making steady and consecutive payments on your student loans. 

    If you have yet to build up credit, you have missed payments, you don’t have decent employment and wages, or you have bad credit, refinancing will be very difficult.

    The main goal of refinancing is to save money, typically by lowering your interest rates and/or your monthly payment. Even if you can get approved for a student loan refinance, if your credit is relatively weak, you may not be able to get the best available rates on your own. 

    If you have weak credit, you may not be out of luck, though. You could:

    • Use a co-signer. One of the easiest ways to still qualify for low interest rates is to use a creditworthy co-signer. 
    • Improve your credit. You can work on building up your credit before applying for a refinance. 
    • Choose a credit union. Credit unions may be more likely to work with members with less-than-ideal credit than private lenders. 
    • Consolidate your federal loans. The federal government offers a way to refinance your federal loans (usually referred to as “federal student loan consolidation”). While you won’t get a lower interest rate, consolidating your federal student loans can make it easier to make your loan payments on time, and this can improve your credit. 

    There are ways to refinance your student loans, lower your monthly payments, and improve your credit history even if you don’t have the best credit.

    Using a Co-Signer

    If you have poor or no credit, one of the fastest and easiest ways to refinance your student loans is to use a co-signer. A co-signer can be anyone who is willing to take on your loan with you. They are as obligated as you are to pay back the loan.

    The loan will show up on their credit report. This means that they need to be willing to take responsibility for the loan if you are unable to make payments. They will be held liable for the loan if you default, which can impact their credit score negatively. 

    A co-signer will need to have:

    • Good credit
    • Stable employment
    • Steady income
    • A low debt-to-income ratio

    The more creditworthy your co-signer is, the better rates you can qualify for. Some lenders will allow the option to drop your co-signer after you make a certain number of on-time and consecutive payments. 

    You can use a spouse, parent, family member, or anyone who is creditworthy and willing to trust you financially as a co-signer. This is one of the fastest and easiest ways to refinance a student loan with bad credit.

    Building Up Credit First

    Students just entering college often do not have any credit history. Thus, it can be difficult to qualify for a student loan with great interest rates. You may see lower interest rates advertised and want to take advantage of them, as lower rates will obviously mean less money out of your pocket. 

    Refinancing grants you a new loan with a private lender who can offer you different rates and repayment options. A student loan refinance is not always the ideal course of action, however. In many cases, it might be better to wait and build up your credit first, so you can qualify for lower interest rates on your own.

    To do so, you should pay off credit card debt, make your student loan payments on time, and aim to lower your debt-to-income ratio. The more money you have coming in and the less you have going out, the better.

    Loan applicants with low debt, stable and steady income, and good credit history have a more likely chance of benefiting from a student loan refinance.

    Using Credit Unions for Refinancing

    Credit unions differ from banks and larger financial institutions in that they are not-for-profit, and they generally require loan applicants to be members of their institution. Credit unions are typically more personal, offering excellent customer service and taking refinancing and loan applications on a case-by-case basis. 

    If you are a member of a credit union, you may be able to qualify for student loan refinancing without an excellent credit rating. Credit unions may look at some of the more intangible things, such as potential earnings and your general financial profile.

    A credit union is more apt to have options that allow you to drop your co-signer after a set point or a number of timely payments.

    Student Loan Consolidation 

    If you have federal student loans, refinancing them with a private lender is not always the best choice. When you refinance federal student loans, you give up any potential benefits that these federal loans had, including access to things like income-driven repayment plans and possible loan forgiveness programs.

    If you have more than one federal student loan, you may want to consider loan consolidation through the U.S. Department of Education. A direct consolidation loan can offer federal benefits, is open to students who may not have optimal credit, and does not charge a fee.

    Federal student loans can feature some of the most favorable and flexible repayment plans. Generally, these loans can be offered to students with less than favorable credit or even those with little to no credit.

    Direct consolidation loans take the weighted interest rate of all your loans and round them up to the nearest one-eighth of a percent. This may not result in a lower interest rate overall and, therefore, could end up costing you more over the life of your loan, but it can lower and simplify your monthly payments.

    With consolidation, you will pay one monthly payment instead of multiple payments. You can also qualify for a longer loan repayment term, which can mean lower payments each month.

    Methods for Student Loan Refinancing

    When you refinance a student loan, you are essentially getting an entirely new loan. This means that your old loan will be “washed” (paid off by your new lender), and you will be issued an entirely new loan with new payment information.

    You will need to undergo a credit check to refinance your student loan. Refinancing student loans can be a good idea if you have been paying your student loans and building up your credit score, have graduated and now have a steady and stable job with a good income, and have a low debt-to-income ratio.

    Refinancing can offer you better interest rates, a potentially lower monthly payment, and possibly more favorable repayment options, which can save you money
    If you do not have excellent credit, refinancing may not be a great idea. The goal of a refinance is to improve your loan terms.

    Refinancing on poor credit will not grant you the best rates unless you use a co-signer. It may be a better idea to wait, build up your credit score, and lower your debt first. 

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