Refinancing can be a great way to save money and combine your student loans into one easy to manage monthly payment. Refinancing is typically a draw for those who are looking to reduce their interest rate, lower their monthly payments, or both! If a lender rejected your application, you might be feeling disheartened. Don't get yourself down just because one lender denied you; it doesn't mean there's nothing left for you to do. We've rounded up some tips to help you recover from your rejection and take control of your student debt.
What Should You Do if a Lender Denies Your Application?
While refinancing can be a good tool for managing student loan debt, no one is guaranteed to get approved for a loan. Lenders who offer refinancing loans have eligibility requirements applicants must meet before they can give them the loan. If you were turned down by one lender, you might be able to work with another company, or work on repairing your credit and apply in the future, depending on your situation.
These steps can help you decide how to move forward — and help you find an alternative.
1. Find Out Why. When you find out that your application was denied, the lender must disclose the reason why. Keep in mind that every lender has a different set of criteria. Take the information below and use it to help your future applications.
If you were denied on your refinancing loan, call your lender and ask them why. By law, they are required to provide you with a reason for the denial. The reason could be as simple as your address having been input incorrectly into the application and can be easily fixed so it is always worth a check. But, if the reason is something else, such as not meeting some of the criteria above and there is no error on your credit report, remember there ma be nothing you can do to change their decision, and you'll have to move on and find another way to repay your student debt.
- Credit Score. As a consumer, you probably think you only have one credit score. There are many different models for "credit score" within each credit bureau, so the score you see when you request it on your credit report is not likely the same as what the lender is receiving when determining your eligibility for a refinance loan. Ask the lender what their threshold is so you can work towards it.
- Income. Most lenders want to see that you are earning enough to pay back the debt you are taking on. Before applying for a refinance loan, you may want to ask the lender if they have a threshold for income in order to qualify for the loan. You may need a cosigner if your income doesn't meet their criteria.
- Debt-to-Income Ratio. Even if the lender doesn't have a minimum income requirement, your income can be very important in helping you qualify for a loan based on how much debt you have. Your debt-to-income ratio, or free cash flow, takes into account how much you have to pay each month towards your debt (mortgages, loans, credit cards, etc.) vs how much money you are taking in each month. A high debt-to-income ratio or law free cash flow can be a sign of financial distress.
2. Investigate Options with Other Lenders
You can begin to look at other lenders once you know why the first lender denied you. Like anything, some lenders are more strict than others, so pay attention to the requirements!
There are several companies that let you complete a pre-application with a soft credit inquiry, so you can find out if you’re a good candidate and determine what rate you'll receive, without damaging your credit score. You can find out if you’re eligible and get an estimate on your rates in as little as two minutes.
3. Find a Cosigner
Finding a credit-worthy cosigner can help you get approved for a refinancing loan. When choosing a cosigner, try to find someone who may have a better credit history and higher credit score than you. They’ll add themselves to your loan as a guarantee. Sometimes, you can get a lower interest rate on your loan by adding a cosigner, even if you qualified for the loan on your own.
Cosigners share the responsibility of the loan with you. If you fall behind on your loan payment, the cosigner would have to make them for you. From a lender's standpoint, it is less risky for them to approve an application that has a cosigner. Consider asking a family member to cosign for you, but make sure they understand their responsibilities.
Credit Repair Tactics
“Credit” is a magic word. It determines your borrowing capacity, which then determines a lot of other factors in your life – where you live, the car you drive – even the cellphone you carry! Of equal importance, your credit score will determine your ability to refinance your student loans. Refinancing can be an extremely valuable tool, so if your credit is less than stellar, it may be time to take a look at repair.
1. Maintain Minimal Balances. If you’re nearly maxing out your available credit on multiple revolving accounts, you should strongly consider paying more than the minimum monthly payment for each debt, putting your focus on your highest-interest rate debt first while potentially giving your credit score a boost prioritizing your repayment will help you to limit the interest you pay, which will reduce the total repayment amount over time.
2. Get Current. If you’re behind on payments, it’s time to catch up. Current payments mean your credit score will steadily creep back to normal, so don’t miss! If money is too tight for a payment, call your creditors.
3. Handle the Past. Resolve public records like judgments. Paying off a debt, even an old one, can mean clearing your credit history and ultimately increasing your credit score over time. Remember that you can offer to settle if the balances are too high to manage. If you have current collection accounts, pay them off! The relief of terminating a credit collection effort will be an added bonus to the long-term help to your credit score. Ask about rehabilitation programs or simply pay off the total balance if you are able to.
4. Manage Your Credit Cards. Don’t open credit card accounts just to increase your credit line without a lot of careful thought. You’re correct in believing that increasing your credit lines overall can help your score, but there’s a price to pay. You may be tempted to use money you don't have when you have more available credit. At the same time, don’t close cards just if it isn’t necessary! One element of your credit score is the average age of your revolving accounts. That means that if you open a no-annual fee card while you’re in college, you should keep it open, as long as you are using it responsibly and not accruing debt you can't pay in full each month. As the card ages, your credit improves. Just remember to only buy on it what you can pay off the same month.
If you were denied, but were just a hair away from meeting the lender's threshold, some simple changes could affect your approval. For example, part of your credit score is determined based on the proportion of revolving debt you have to your available credit line. Paying off a credit card balance (and not using the card for a month or two) might be all you need to do to give your FICO score a little life.