So I got a car recently, and the dealer and my parents agree that refinancing will be a good idea soon. How does it make sense for another creditor to buy your credit and give you a better rate? Why would the original creditor not just keep you on the hook for the worse rate?
In: Economics
> How does it make sense for another creditor to buy your credit and give you a better rate
– It sounds like you’re a young person just starting out. If you have little-to-no credit history, your credit score might improve a lot after having a car loan for 6-12 months with no late / missed payments.
– General interest rates might be lower for whatever reason.
– Even if the interest rate is the same, a refinance might still give you lower payments that continue for a longer time [1].
> Why would the original creditor not just keep you on the hook for the worse rate?
Read your loan contract. It probably says you can pay off the loan early without penalty. Why do they put that in the contract? They might have to (due to laws / regulations), plus expectations (people expect to be able to do refinancing / early repayment of loans so if your loan contract doesn’t allow that, people might complain and you’ll find it hard to get new customers.)
[1] This one needs some explaining, so here’s an example:
– The day you bought your car, you borrowed $10,000 (with no interest, for simplicity) from the Bank of Alice. You pay Alice $2000 a year for the next 5 years.
– You then refinance in two years: You borrow $6,000 from the Bank of Bob, and use that money to pay off your remaining $6,000 debt to Alice immediately. You then repay Bob $1200 a year for the next 5 years.
– Your payments are: (2024: $2000, 2025 : $2000, 2026 : $1200, 2027 : $1200, 2028: $1200, 2029: $1200, 2030: $1200).
– Alice gets $2000 in two years (2024 and 2025), then she gets $6000 in a lump sum at the beginning of 2026 (that’s the $6000 you borrow from Bob when you refinance in 2026).
– Bob gets $1200 in 2026-2030.
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