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How can a lender make more money if you don't pay off your loan early

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  1. Aug 22, 2010 #1
    or pay a prepayment penalty? Il
     
  2. jcsd
  3. Aug 22, 2010 #2

    HallsofIvy

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    I'm not sure I understand your question. A lender charges a specific annual percentage which means you are charged a specific percent of the loan per month (or day or year, ...) Obviously, the longer you keep the loan, the more you will have to pay the lender. That is why some lenders charge a "prepayment penalty", to make up at least some of the money they would lose by your not keeping the loan for the period you had agreed to orginally. (Although there are strict laws on this in most areas. Most governments want to encourage citizens to NOT carry a lot of debt and so want to encourage early payment of loans.)
     
  4. Aug 22, 2010 #3

    Redbelly98

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    Quick answer: by charging interest.
     
  5. Aug 22, 2010 #4

    Mentallic

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    If the lender was expecting the money by a due date because he needed the money by then, and the other couldn't pay him back as of yet, the lender could always borrow from somewhere else.
     
  6. Aug 22, 2010 #5

    CRGreathouse

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    When you borrow money from a bank, they borrow the money to lend to you. But they are able to borrow at a better rate than you can, perhaps 2% instead of 5%. So for every year that passes, they make (say) 5% - 2% = 3% of the remaining balance in interest. If you pay off the loan, they make no further money; if you pay down the loan early, they make less money in direct proportion.
     
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