0

Refinance Question Car Loan:

Two years ago, you purchased a $20,000 car, putting $4,000 down and borrowing the rest. Your loan was a 36-month fixed rate loan at a stated rate of 6.0% 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 5.0% 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?

  1. Yes, gain $30.32

  2. No, lose $30.32

  3. No, lose $169.68

  4. Yes, gain $169.68

Can anyone explain how to do this question? I am not getting any of these answers when completing the questions.

Thanks!

  • 1
    For this and your other question, you could work out the full amortization schedule to see the difference in the two scenarios. There's not a formula that you can apply easily to get the right answer. – D Stanley Jul 18 '17 at 17:27
  • 2
    "I am not getting any of these answers when completing the questions." What answer are you getting, and how are you getting there? – Grade 'Eh' Bacon Jul 18 '17 at 17:40
4

Step 1: Figure out where you are now. You are 2 years into a three year loan, what is the balance?

Step 2: Figure out how much interest you will pay if you stick with the existing loan.

Step 3: Figure out how much interest you will pay if you refi. A one year loan at 5% for the balance in step 1. The add $200.

Step 4: Compare.

The most difficult part is step 1.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.