Question
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
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 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 5.5% 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) Yes, gain $45.89
B) No, lose $154.11
C) No, lose $45.89
D) Yes, gain $154.11
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