If Janet refinances her loan to a lower interest rate but extends the repayment period, what would be the impact on the total interest Janet would have paid over the life of the loan?

• A. The total interest paid would remain the same.
• B. The total interest paid would decrease.
• C. The total interest paid would be eliminated.
• D. The total interest paid would increase.

Answer: (D)

Verified step by step guidance

1. Understand the concept of loan refinancing: Refinancing a loan involves replacing an existing loan with a new one, typically to secure a lower interest rate or adjust the repayment terms.
2. Analyze the impact of extending the repayment period: When the repayment period is extended, the borrower makes payments over a longer duration, which can lead to more interest accruing over time, even if the interest rate is lower.
3. Consider the formula for calculating total interest paid: Total interest paid is determined by the principal amount, interest rate, and the duration of the loan. Extending the duration increases the time over which interest is calculated.
4. Compare scenarios: If Janet keeps the original repayment period with a lower interest rate, the total interest paid would likely decrease. However, extending the repayment period increases the total interest paid due to the longer duration of interest accrual.
5. Conclude the impact: Refinancing to a lower interest rate but extending the repayment period results in an increase in the total interest paid over the life of the loan, as the longer repayment period outweighs the benefit of the lower interest rate.