How does refinancing work?

Question

i understand people do it for lower interest rates but how does that benefit the bank/company?

In: Economics

Answer 1

You have two friends, Bob and Charlie. Charlie owes Bob $1000 and he promised that he would pay Bob 6% interest on that money.

You tell Charlie that if he gives you $20, you’ll loan him $1000 to pay off Bob, and he only has to pay you 5% interest on that money instead.

Bob is aware of this, so he might decide to match your offer and also offer Charlie 5% interest instead, because he’d rather Charlie pay him 5% interest than no interest at all.