What’s the point of providing OID on a loan? Why not just increase the interest rate instead?

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You can book an immediate fee income at close and you can skim a portion of the oid when you syndicate.

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OID is earned / amortized over life of the issue, however OID skim is indeed booked as immediate income to the selling bank.

Debt issued with an OID is usually prepayable. There is a risk the investor in the debt does a ton of work to underwrite and close the deal, only to be refinanced out weeks later. It happens. In addition to what A1 indicated, it gives the investor some comfort they would earn something on the deal if it were to prepay earlier than they modeled.

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