What does it mean to refinance a loan?

Refinancing a loan involves replacing an existing loan with a new one, usually with the intent to secure more favorable terms or lower interest rates. This process allows borrowers to benefit from reduced monthly payments, decreased interest costs over the life of the loan, or adjustments to the loan's duration. By refinancing, individuals can take advantage of changes in their financial situation or shifts in economic conditions that make it beneficial to update their loan agreement.

For example, if interest rates have fallen since the original loan was taken out, a borrower might refinance to reduce their interest rate, resulting in lower payments. Additionally, refinancing can lead to a change in the structure of the loan, such as moving from an adjustable-rate loan to a fixed-rate loan, providing more stability in payment amounts.

While the other choices refer to related financial concepts, they do not accurately define refinancing. Using a credit card to pay off a loan or extending the repayment term does not involve replacing the existing loan with a new one, and consolidating multiple loans is a different process focused on combining debts rather than altering the terms of a single existing loan.