What does it mean to refinance a loan?

Refinancing a loan refers to the process of taking out a new loan to pay off an existing loan. The primary purpose of refinancing is often to obtain better terms, such as a lower interest rate, which can lead to reduced monthly payments and overall savings on interest. Additionally, refinancing can provide the borrower with a chance to change the loan's terms, such as the repayment period or type of interest rate (fixed vs. variable).

While securing a loan with collateral involves using an asset as a guarantee for the repayment of the loan, this doesn't describe refinancing. Similarly, consolidating multiple loans into one refers to a different financial strategy aimed specifically at combining debts for simplification, and negotiating lower monthly payments can be a part of refinancing but is not the definition itself. Thus, the essence of refinancing is accurately captured by the idea of replacing an existing loan with a new one.