Loan refinancing means taking out a new loan to pay off one or more outstanding loans.
Borrowers usually do this to get lower interest rates or to otherwise reduce their repayments. It can also reduce or alter risk by switching between a variable-rate and a fixed-rate loan.
Refinancing can be used to get a longer term loan with lower monthly payments. In these cases, the total amount paid will increase, as interest will have to be paid for a longer period of time. Some fixed-term loans have penalty clauses - a charge for early repayment of the loan, in part or in full. There are normally transaction fees on the refinancing.[1]
Refinancing also means providing a central bank of commercial banks with additional reserves on a credit basis, such as borrowed reserves. The initiators of refinancing are commercial banks. They turn to the central bank when they cannot replenish their reserves from other sources.