Two years ago, you purchased a $18,000 car, putting $3,500 down and borrowing th
ID: 2823420 • 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?
Explanation / Answer
Since the cost under refinancing is more than continuing the first loan, first loan should be continued
Loss on refinancing = 1846.59-1717.92 = $128.67
Loan Amount(PV) £14,500.00 Annual Interest Rate ('r) 7.00 % Loan Period in Years (n) 3 Number of Payments Per Year (m) 12 Loan Payment= r/m*(PV)/(1-(1+r/m)^-n*m) = ((0.07/12)*14500)/(1-(1+(0.07/12))^(-3*12) = 447.72 Total Payments= 447.72*36 = 16117.92 Interest= 16117.92-14500 = 1617.92Related Questions
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