You work hard to maintain your independence. Then why weigh yourself down with bloated student loan payments? The myth is that self-employed people have trouble refinancing their student loans. The reality is that the true entrepreneur always finds an answer.
A major market force
According to the Pew Research Center, 14.6 million people — or about 10 percent of the workforce — are self-employed. Self-employed people also had 29.4 million employees. All this put together represents about 30 percent of the national workforce.
The reality is that many lenders won’t hold the fact that you’re self employed against you if you want to refinance your student loans. However, there are some factors that come into play more than others.
The top criteria
When you send in a loan refinancing application, lenders focus on several key indicators. These are:
- Debt-to-income (DTI) ratio
- Credit score
- Late payment / delinquencies
- Total income
- Highest completed level of education
- Schools (university, college) attended
- Loan size
For the self-employed, number 7 tends to stand out. Many entrepreneurs had to take out extra loans to get their business off the ground. This means the amount they need to refinance may be more. Still, this is only one factor among many. In fact, there are at least 21 categories lenders may consider when evaluating your loan application. If you look hard enough, and ask enough lenders, there’s a good chance you’ll find one that fits you.
For most, rejection is part of the process
If you look at the stats, many eligible borrowers get turned down by several lenders before getting accepted for refinancing. Up to 23 percent of borrowers actually got rejected by five lenders before getting approval. A total of 68 percent of eligible borrowers were turned down by three or more lenders. Unfortunately, many people throw in the towel after just one or two tries.
A lender marketplace can speed up the loan refinancing process by letting eligible borrowers see the actual rates they prequalify for with multiple lenders. This can be a great time saver and help improve your chances of getting approval. The other advantage to these platforms is that lenders actually compete to win your refinancing business. This means you might get an even better rate from these marketplaces than if you contacted the lender directly.
Don’t worry about it affecting your credit score
In order to show you accurate rates, the lender marketplace Credible uses a soft credit inquiry that doesn’t affect your credit score. If you see an option you like, the lender will ask you to authorize a hard credit inquiry before offering you a loan.
A hard credit inquiry can have a minor impact on your credit score — according to Fair Isaac, creator of the widely used FICO score, it will typically take less than five points off your score. When you apply for the same type of loan with multiple lenders during a rate-shopping period (typically 30 days), credit scoring models usually treat all of those applications as a single hard credit inquiry.
Think ahead about refinancing strategies
When you refinance, you replace your old loan for a new one with a lower interest rate. Depending on the lender’s terms you might have three options:
- Reduce your monthly payments, but take as long or longer to repay your loan
- Maximize savings by increasing your monthly payments, paying off your loan faster
- Stay on the same repayment schedule, but with a lower monthly payment and overall repayment costs
Look at how your business is going when making the decision. For instance, if the profits are rolling in, you might want to get the loan paid off as soon as possible. If you’re still in a growth and investment phase, it may be better to keep your monthly costs low.
Final thought for federal student loan holders
If you have a federal student loans, think carefully. Refinancing your loan with a private lender may lead to a loss of federal borrower benefits (income-driven repayment programs, loan forgiveness, etc). However, the savings from refinancing may outweigh these benefits. You might have to crunch some numbers, but either way, it’s nice to have options.