How do lenders make profit by transferring their loans to bigger lenders?

If you mean transferring servicing, this means that the company who cuts the bills and correspondence for your loan has changed. Basically, it means that the company receives a small amount each year for their collection and compliance efforts. While small, it does not take a mathematician to calculate that many of those put together makes a large amount of servicing fees that can be quite profitable, So a servicing company may Choose to sell some to earn money (without collection efforts). If you mean actually selling the loan, that is very rare. Hypothetically if you had a 30 year loan out, you might want to cash in on it early instead of having to wait 30 years to get your money back. However this is rare since the loan is actually held by large entities who drive most USA traditional home lending. So those institutions actually fund the loan (Fannie Mae, Freddie Mac, etc.)

There are many reasons for lenders selling loans and/or simply transferring servicing rights (who collects the payments, etc) to someone else. Cory gave a great answer for transfering servicing to someone else. But the most important thing to understand in that either selling or transfering servicing rights, for you it doesn't change anything to do with the terms or conditions of your loan, it simply means making your payment somewhere else. For most, it is only a slight annoyance one time setting up new automated payments, or new online account access. Also note that there is nothing you can do to prevent it. I lend in WI, MN, and SD, and can get reached at WI-MortgageBroker.com (NMLS274132)