Two years ago, you purchased a $18,000 car, putting $3,500 down and borrowing th
ID: 2620000 • Letter: T
Question
Two years ago, you purchased a $18,000 car, putting $3,500 down and borrowing the rest. Your loan was a 36-month fixed rate loan at a stated rate of 7.0% per year. You paid a non-refundable application fee of $100 at that time in cash. Interest rates have fallen during the last two years and a new bank now offers to refinance your car by lending you the balance due at a stated rate of 4.5% per year. You will use the proceeds of this loan to pay off the old loan. Suppose the new loan over the residual loan life requires a $200 non-refundable application fee. Given all this information, should you refinance? How much do you gain/lose if you do?
A.no,lose 69.59
B.yes,gain 69.59
C.no,lose 130.41
D,yes agin 130.41
Explanation / Answer
car cost 18000 down payment 3500 finance 14500 rate 0.583% (7%/12) NPER 36 (3 X 12) PMT(emi) $447.69 =PMT(0.00583,36,-14500) Present value of loan $5,174.01 =PV(0.07/12,12,-447.72) New bank finance $5,374.01 (5174.01+200) rate 0.375% (4.5%/12) NPER 12 PMT(emi) $458.83 =PMT(0.00375,12,-5374.01) Difference in EMI $ 11.134 Present value of difference in EMI at 0.375% $130.41 So , he will lose $130.41, no he should not refinance =PV(0.375%,12,-11.134) Option C
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