Student loans can be an enormous financial strain. Before making your decision, using a loan calculator to compare interest rates and repayment terms is essential to making informed decisions.
Refinancing can save money when executed correctly, with lower interest rates and shorter loan terms as a result. However, many borrowers make costly errors that cost money down the line. Student loans refinancing mistakes like the huge ones below should always be avoided.
1. Taking out more than one loan
Student loans are one of the main sources of consumer debt and should be carefully managed. While some mistakes with your student loan may be unavoidable, borrowers should work to avoid costly errors that extend repayment timelines or lead to higher interest rates.
Many borrowers take out multiple loans at once, increasing overall costs. It can be challenging to monitor each loan’s details and make payments on time for all.
Before considering loans, borrowers should first explore free money sources such as scholarships, grants, and tuition waivers. They should also carefully consider all refinancing offers as this will give them the best deal available.
Borrowers should make it a point to use the pre-qualification tool provided by lenders to see which rates they qualify for without conducting a hard inquiry on their credit report. Furthermore, using a student loan refinancing calculator will allow borrowers to assess savings by switching lenders.
2. Taking out a loan with a high interest rate
The rates you qualify for when refinancing student loans depend on several factors, including credit score, income, debt-to-income ratio, savings history, and payment history. Online calculators can help estimate potential interest rates; then, use these estimates to shop around for the best offer. Some lenders even provide prequalification tools that don’t involve hard inquiries into your credit report.
Adopting student loans refinancing plan with lower interest rates can save money over time, but it’s essential to do your research before making any decisions. For instance, opting for a longer repayment term could increase the total cost of interest you owe.
Consideration should also be given to how refinancing federal student loans with private lenders could void your eligibility for income-driven repayment plans, deferment, and forbearance options that could help if payments become difficult. This could have serious ramifications if payments become difficult.
3. Taking out a loan with a long repayment term
Student loan debt is an unavoidable reality of life for many individuals, and it’s crucial that we all understand how they operate and the effect they can have on future goals.
One of the most frequent mistakes borrowers make when selecting loans is selecting one with an extended repayment term. While this may help lower monthly loan payments, this decision often costs them more over time as most payments go directly toward interest payments.
Borrowers must take great care not to miss payments or default on their loans, which could happen if they mismanage their loan information and forget to make their payments on time. Therefore, setting a budget and monitoring student loan repayment status is imperative.
Refinancing federal student loans with private lenders is another mistake borrowers sometimes make, which may prevent access to federal protections and increase overall costs.
4. Taking out a loan with a co-signer
Student loan refinancing can save borrowers hundreds, if not thousands, in interest payments. But before proceeding with refinancing, it’s essential that borrowers take time to consider all aspects of their debt and shop around for lenders with suitable rates.
Sherpa Tip: When searching for student loan refinance lenders, don’t overlook key features like borrower perks and protections, repayment terms, cosigner release programs (if applicable), and customer reviews as you compare lenders.
Cosigning a loan involves taking on joint and equal responsibility to repay it, which can be challenging in times of financial strain or difficulty finding employment. Furthermore, every missed or late payment will impact both credit scores and have long-term repercussions, such as damaged relationships and an incomplete credit history.