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Is 2018 the year you’re going to get your finances in order? If making better decisions about your money is one of your resolutions, you’re one of millions chasing that goal.
In our survey of the top money-related New Year’s resolutions of 2017, paying off debt came first. However, keeping a resolution can be hard. Only a small fraction of those who make a resolution actually keep it throughout the year.
Although achieving your resolutions is difficult, it’s not impossible — and it doesn’t need to be a tedious 12-month grind, either. If you have student loan debt, you can actually improve your finances in just a few minutes by refinancing your loans.
What is student loan refinancing?
Refinancing your loans can be a smart way to consolidate your debt, lower your monthly payment, or reduce your interest rate. When you refinance, you work with a private lender to take out a new loan in the amount of some or all of your current loans.
The new loan may have different terms, including length of repayment, minimum payment due, and interest rate. Also, you’ll have just one easy payment rather than multiple payments each month.
6 ways refinancing can help you stick to your resolutions
Although there are some drawbacks to refinancing, particularly if you have federal loans, refinancing your student debt can be a powerful tool to improve your finances.
Here are six ways refinancing can help you achieve your money goals:
1. You can free up money in your budget
If your monthly student loan payment is more than you can afford, or if it’s so high you don’t have enough left over to save, refinancing your loans could result in a lower payment.
When you refinance, you can opt for a longer repayment term. If you have five years left on your loan, you could extend repayment to seven or 10 years to make your monthly payments more affordable.
For example, if you borrowed $10,000 at 6.00% interest and repaid it over five years, your minimum monthly payment would be $193. If you refinanced that loan and extended your repayment term to 10 years, your payment would drop to $111, assuming you didn’t qualify for a lower interest rate. That means you’d have an extra $82 per month, or $984 a year, after refinancing.
It’s important to note that extending your repayment period will leave you in debt for longer, meaning you might pay more in interest over the life of your loan. But a smaller monthly payment could give you more breathing room in your budget or extra cash for other financial resolutions such as investing or saving for retirement.
2. You can become debt-free sooner
If your New Year’s resolution is to become debt-free as soon as possible, refinancing your loans can help accelerate your repayment.
When you refinance, you could qualify for a lower interest rate; some lenders offer fixed interest rates as low as 3.15%. If you get a lower interest rate but keep the same repayment term, more of your payment will go toward the principal rather than interest.
Let’s say you borrowed $35,000 at 6.00% interest with a 10-year repayment term and a minimum payment of $389 per month. Over the length of your repayment, you’d pay $11,629 in interest alone.
If you refinanced that same loan and nabbed an interest rate of 3.15%, you could pay off your loan a full year early without increasing your payments. With a nine-year term, your new loan would have a minimum payment of $373.
3. You can lower your debt-to-income ratio
If your goal is to buy a home in 2018, your debt-to-income (DTI) ratio plays a big role in getting a mortgage. Your DTI ratio looks at your monthly debt payments compared to your earnings, and is a number lenders use to determine whether you can afford a mortgage. The lower your DTI ratio, the more likely you are to get a mortgage.
If your DTI ratio is high, refinancing your student loans can help reduce it. If you refinance and opt for an extended repayment term or qualify for a lower interest rate, you can reduce your monthly obligation and improve your DTI ratio.
4. You can save money over time
Saving more money is one of the biggest New Year’s resolutions, and refinancing can help you achieve that goal. Spending just a few minutes applying for a refinancing loan can result in thousands saved for qualified borrowers.
For instance, if you borrowed $35,000 at 6.00% interest with a 10-year repayment term and a minimum payment of $389 per month, you’d pay back $11,629 just in interest charges.
If you refinanced that loan and received a 3.15% interest rate and stuck to a 10-year repayment term, you’d pay just $5,847 in interest. Refinancing your loans would save you over $5,500.
The money you save can be used to boost your emergency fund, build your retirement nest egg, or go toward a down payment on a home.
5. You can lock in a good interest rate
If you took out private student loans, you might have a variable interest rate. That means your interest rate can increase over time. Your payments with a variable-rate loan can start out affordable but increase over time as the interest rate fluctuates.
Refinancing your loans can eliminate interest rate changes and lock in a fixed rate, meaning both the interest rate and your minimum payment won’t change over the length of your loan.
6. You can free a cosigner from the loan
Strengthening relationships is another common New Year’s resolution. Although you might not realize it, your student loans can be harmful to your relationships with friends or loved ones.
If your current student loan includes a cosigner — someone who agrees to take equal responsibility for the debt — your cosigner has to make payments on the loan if you fall behind. Also, having that debt on their credit report can hurt their chances of getting other kinds of loans, such as an auto loan or mortgage.
That burden can strain your relationship with your loved one. One way to eliminate that stress is to refinance your loans into just your name or with a lender who offers cosigner release. A cosigner release allows you to take your cosigner off the loan, freeing them from any obligation on the debt.
Find a refinancing lender
Refinancing can be an effective way to jumpstart your financial New Year’s resolutions. If you’ve researched the benefits and drawbacks of refinancing and decided it’s right for you, compare refinancing loan offers from multiple lenders to get the best deal.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Rates (APR)||Eligible Degrees|
|Get real rates from up to 4 Lenders at once
Check out the testimonials and our in-depth reviews!
|2.57% – 6.32%||Undergrad & Graduate||Visit Earnest|
|2.80% – 7.02%||Undergrad & Graduate||Visit Laurel Road|
|2.51% – 7.80%||Undergrad & Graduate||Visit SoFi|
|2.76% – 8.54%||Undergrad & Graduate||Visit Lendkey|
|2.57% – 6.65%||Undergrad & Graduate||Visit CommonBond|
|2.75% – 8.69%||Undergrad & Graduate||Visit Citizens|