Glossary term
Refinancing
Refinancing replaces an existing loan with a new one, usually to get a lower interest rate, a different term or a lower payment. The new lender pays off the old loan, and you repay the new one. It saves money when the rate drop outweighs any fees, but stretching the term can raise total interest.
Updated October 17, 2026 · Editorial Team
How Refinancing works in practice
When you refinance, you apply as you would for any loan. Your credit, income and the collateral's value affect the new rate. Fees, such as an origination or title fee, add to the cost, and some old loans have prepayment penalties. The key comparison is total remaining cost, not just the monthly payment.
Owe $20,000 with 48 months left at 9.00% and your payment is $497.70, with $3,889.60 of interest to go. Refinance the same balance at 6.50% for 48 months, and the payment drops to $474.30 with $2,766.40 of interest. That is $23.40 less a month and $1,123.20 saved, before any fees.
Refinancing tends to help most early in a loan, when more of the balance is left to accrue interest. If you extend the term to lower the payment, compare total interest on both paths, because a longer loan at a lower rate can still cost more.
Refinancing: quick questions
When does refinancing make sense?
When the new rate is meaningfully lower and the savings beat any fees, without stretching the term so far that total interest rises.
Does refinancing hurt my credit score?
Applying creates a hard inquiry and a new account, which can lower a score slightly for a while.
Should I refinance federal student loans into a private loan?
That gives up federal benefits such as income-driven repayment. Weigh those protections against any rate savings.
Sources
- Auto loans — Consumer Financial Protection Bureau. Accessed October 17, 2026.
- Student loans — Consumer Financial Protection Bureau. Accessed October 17, 2026.
We cite primary sources: regulators, central-bank data and federal agencies. Worked examples on this page are our own calculations. See our methodology.
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