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
For you, the person taking out the loan, you might want to refinance to get a better rate, and possibly to change the duration of the loan. A better rate means you pay less interest, obvious win there. Changing the loan duration to be shorter means bigger payments each month but less money spent on interest overall, that might be appealing if you’ve got a bit more money to spend each month. Changing the loan duration to be longer probably means more interest overall, but smaller monthly payments, which might be necessary for you if you’ve got less money to spend each month.
For the initial creditor, if you’re refinancing with someone else, the initial creditor might not really have any say in it, assuming the new creditor pays off that initial loan. Basically you’re taking out a new loan with a different creditor, and using the money they gave you to pay off that initial loan. Generally the terms of the loan will allow you to pay the whole thing off early if you want to and you have the money to do so.
But also, depending on market conditions, that initial creditor might agree to refinance your loan themselves, rather than risk you finding a new creditor. The initial creditor then might get less interest over the lifetime of the refinanced loan than they would’ve gotten from the original terms, but that’s still more than the zero they’d start getting if you moved to a new loan with a different creditor.
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