What is refinancing?Loan refinancing is a financial option that’s become more popular over the past two decades as a result of growing consumer debt and low interest rates. While you might’ve heard the term before, you might be wondering how exactly refinancing works and what types of loans you can refinance. In this post, we’re describing what it means to refinance, the potential benefits of refinancing, as well as how you can begin to evaluate if it’s right for your situation. Read on to learn all about loan refinancing.

How does refinancing work?

In the simplest terms, refinancing (sometimes colloquially referred to as a “refi”) is the replacement of a debt, usually a type loan, with a new loan. The idea is that you use the new loan to clear the old debt and start working toward paying off the new loan instead. Ideally, you should benefit from this because the replacement loan, the one that will be used to refinance your existing debt, should have better terms of payment (e.g., a lower interest rate) than the original loan, which brings us to our next point.

Why would you want to refinance?

Refinancing can be a boon in many circumstances. If you’re looking to bring down the interest rate of your loan or alter your loan’s payment timeline, refinancing can help you do so. Refinancing can also help you consolidate debt if you negotiate an arrangement that allows you to borrow enough money to cover multiple loans. For example, many students might benefit from refinancing their student loans because most financial aid packages issue multiple loans to students who borrow while in school. Having to pay back each of these loans individually, all at different interest rates, could result in a student paying more money over the lifetime of their student debt than they would if they only had one loan with a lower rate. Another thing refinancing allows you to do is to change the type of interest of your loan. The two most common types of interest are fixed and variable. If you have a credit card, you’re familiar with variable interest rates, which means your interest rate could fluctuate during the life of the account. On the other hand, a fixed rate means that the interest rate will never change over the entire life of the account.

What types of debt can be refinanced?

Most of the balances that consumers pay can be refinanced. Aside from student loans, which we mentioned above, this can include mortgages, car loans and personal loans. The more important question, though, is whether or not you can benefit from refinancing a debt. Similar to most financial decisions, you’ll want to understand what benefits you’ll be getting out of refinancing before committing to it. Saving money by paying less in interest or lowering the number of payments you have to make are good reasons to consider refinancing — keep in mind that for the best interest rates, you’ll need to have good or excellent credit. Another appropriate reason for refinancing is to benefit from changes stemming from the Federal Reserve’s monetary policy. For example, should the Fed continue to raise interest rates, switching to a fixed rate loan might be a good idea to keep your overall payments down. That’s because if you maintain a variable rate loan, your rates will go up. The opposite can be true when the Fed lowers interest rates, as variable loans tend to give the lowest rates when the Fed lowers rates. However, you shouldn’t let the Fed’s policies dictate when you refinance. Make sure to take a good look at the going rates for certain loans when you’re considering refinancing.

Who can help you refinance?

Most financial institutions that lend also can help you refinance. If your bank or local credit union doesn’t give you the best deal, though, you might want to consider a personal loan service. These services specialize in providing loans for a myriad of purposes, including for refinancing. It’s often best to consider a number of lenders before signing onto a loan, as you’ll want to make sure that you get the best rates and terms for your situation. While refinancing might seem complicated, keep in mind that you have a lot of options to help you with the process.

For more advice about borrowing and managing personal loans, keep reading our personal finance blog.