When a person takes out a large loan, he may not want to stick to the terms of the loan for its entire life. A borrower has two options with regard to changing the loan's terms. First, if he wants to stay with his current lender, he can ask the lender to modify the loan. However, the borrower is also allowed to seek out loan offers from new lenders in a process called refinancing.
When a loan is refinanced, it means that the borrower's outstanding loan -- usually a large loan, such as for a house -- is paid off by a lender. In exchange for paying off the loan, the lender will issue the borrower a loan with new terms. This process is usually initiated at the behest of a borrower, who wants different terms for his loan, not the lender.
Shopping for a Loan
When a borrower wants to swap out the loan he is currently paying off, he will usually not just ask his current lender, but will shop around a bit among other lenders. Other lenders may have different lending policies that make for more favorable loans. Depending on the borrower's financial situation, some of these lenders may be willing to offer him more advantageous rates that his current lender.
Choosing A Lender
A person can, but does not have to, refinance with another lender. However, if the person wishes to modify, not refinance, his current loan, he can only do that with the permission of his current lender. Typically, a borrower will refinance with the lender who is prepared to offer him the most favorable rates on the loan -- for instance, the lowest interest rate or the lowest monthly payment -- depending on the kind of loan he is looking for.
Sticking With The Same Lender
Sometimes, a borrower will refinance with his current lender. There may be several reasons for doing this. First, the borrower may have a good relationship with his current lender and his lender may be willing to offer his favorable terms unavailable to him from other lenders. Secondly, the current lender may be willing to wave some of the typical refinancing fees, such as the prepayment fee -- a fee a person pays for paying off a loan early -- making refinancing with the current lender more financially advantageous.