Refinancing

Refinancing is the process of revising and replacing the existing credit agreement with another one that has more favourable terms. Refinancing can involve taking another loan (a refinancing loan) to pay back the original debt or renegotiating the existing loan terms and signing a new loan agreement with changes (favourable for the borrower) to the interest rate, payment schedule, and/or other terms. Borrowers often choose to refinance when the interest-rate environment changes, causing potential savings from a new agreement. But the lender might also agree to refinance if the borrower is under financial distress and is unlikely to repay the debt under existing conditions – easing the terms might decrease returns but increase the likelihood of a full repayment (this is often called debt restructuring).