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
Let’s start backwards. Most loans don’t have early repayment penalties—you can pay back the entire remainder of the loan whenever you want. They can’t just “keep you on the hook.”
Now, if I go to a different bank from my current lender and they give me a loan at a lower rate to pay off my current loan, that’s a refinance in a nutshell.
So now, my original lender knows I can do this. So rather than lose ALL of the interest I will be paying over the remainder of the loan, they decide to lose just SOME of it by letting me refinance with them.
There are usually (sometimes significant) fees associated with refinancing, so it doesn’t always pay unless the rate drops enough.
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