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
There’s two main factors at play. When you loan someone money, there’s a risk they won’t pay you back. And, in the US, when you make a payment on a debt the payment is applied to interest first, with any remainder going to your principal (the amount you actually owe). Since your payment amount doesn’t change, the majority of your early payments only pay for accrued interest on your balance, with principal payments coming later down the line.
From the bank’s point of view, they collect their interest up-front, then get paid off when you refinance. They get their money back and no more risk of default. It’s an easy yes from them.
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