Chapter Contents
Previous
Next
|
Chapter Contents |
Previous |
Next |
| The LOAN Procedure |
The LOAN procedure can compare alternative loans on the basis of different economic criteria and help select the most desirable loan. You can compare alternative loans through different points in time. The economic criteria offered by PROC LOAN are
The figures for present worth of cost, true interest rate, and interest paid are reported on the cash flow through the comparison period. The reported outstanding principal balance and the periodic payment are the values as of the comparison period.
The COMPARE statement specifies the type of comparison and the periods of comparison. For each period specified in the compare statement, a loan comparison report is printed that also indicates the best alternative. Different criteria may lead to selection of different alternatives. Also, the period of comparison may change the desirable alternative. See the section "Loan Comparison Details" later in this chapter for further information.
proc loan start=1998:12 amount=120000;
fixed rate=7.5 life=360 label='30 year loan';
fixed rate=6.5 life=180 label='15 year loan';
compare;
run;
The default loan comparison report in Figure 13.7 shows the ending outstanding balance, periodic payment, interest paid, and before-tax true rate at the end of 30 years. In the case of the default loan comparison, the selection of the best alternative is based on minimization of the true rate.
Based on true rate, the best alternative is the 15-year loan. However, if the objective were to minimize the periodic payment, the 30-year loan would be the more desirable.
According to current U.S. tax laws, the loan for a family home qualifies the interest paid on the loan as a tax deduction. The TAXRATE=28 (income tax rate) option on the compare statement bases the calculations of true interest rate on the after-tax cash flow. Assume, also, that you are uncertain as to how long you will keep this property. The AT=(60 120) option, as shown in the following example, produces two loan comparison reports through the end of the 5th and the 10th years, respectively:
proc loan start=1998:12 amount=120000 life=360;
fixed rate=7.5 label='BANK1, Fixed Rate';
arm rate=6.0 worstcase caps=(0.5 2.5)
label='BANK3, Adjustable Rate';
compare taxrate=28 at=(60 120);
run;
The two loan comparison reports in Figure 13.8 and Figure 13.9 show the ending outstanding balance, periodic payment, interest paid, and after-tax true rate at the end of five years and ten years, respectively.
|
| ||||||||||||||||||||||||
|
| ||||||||||||||||||||||||
The loan comparison report through December 2003 picks the adjustable rate loan as the best alternative, whereas the report through December 2008 shows the fixed rate loan as the better alternative. This implies that if you intend to keep the loan for 10 years or longer, the best alternative is the fixed rate alternative. Otherwise, the adjustable rate loan is the better alternative in spite of the worst-case scenario. Further analysis shows that the actual breakeven of true interest rate occurs at August 2008. That is, the desirable alternative switches from the adjustable rate loan to the fixed rate loan in August 2008.
Note that, under the assumption of worst-case scenario for the rate adjustments, the periodic payment for the adjustable rate loan already exceeds that of the fixed rate loan on December 2003 (as of the rate adjustment on January 2003 to be exact). If the objective were to minimize the periodic payment, the fixed rate loan would have been more desirable as of December 2003. However, all of the other criteria at that point still favor the adjustable rate loan.
|
Chapter Contents |
Previous |
Next |
 Top |
Copyright © 1999 by SAS Institute Inc., Cary, NC, USA. All rights reserved.