Eli5 ‘How do personal loan companies make money if you pay everything you loaned back,before the first installment date (and no early repayment fee either)?’
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If a company does operate that way, the catch is they expect very few people to pay it all back on time.
Payday loan companies are notorious for high interest rates and preying on folks that are terrible with their finances to begin with so they rake in the money while taking advantage of people.
My boss used to work for one and the unofficial motto was “forever in debt”
The bulk of people who use such services tend to be the kind of people who, for whatever reasons, can’t manage to consistently pay loans on time. Thus, they are forced to rely on these personal loan services, as other lenders will not lend to them, and they often can’t pay off such loans early. Personal loan companies rely on this inconsistency to make money despite offering services with seemingly lax upfront terms.
I work for a large retailer. When we process an Interest Free Credit sale we can’t apply any discount to the sale, because a percentage of the Gross Profit is paid to the IFC provider as a commission.
It depends on the type of loan, but some make money of the retailer. For example credit cards make money at the point of sale. Some installment loans take a commission from the retailer.
Overall it’s very unlikely that a person would go through the trouble to take out a personal loan just to pay it all back before the first installment.
There may be a loan origination fee. But the situation you’re describing is pretty rare. If someone has the money to pay back the entirety of a loan before the first payment date, they likely don’t need the loan and wouldn’t pursue one in the first place.
Simply put. Their business model and target demographic are people being in a situation to not do that. It’s legal loansharking
If someone pay’s it back with no interest and no fee, then the company doesn’t make money from that specific transaction.
But almost all people in the situation where they need to use a personal loan company, aren’t the kind that can pay the loan back in time.
So sure they might actually lose money on 0.01% of customers, but they make a boatload from 99.9% of their customers that covers any losses.
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