Example 13.3: Prepayments on a Loan

The LOAN Procedure

Example 13.3: Prepayments on a Loan

This example compares a 30-year loan with and without prepayments. Assume the 30-year loan has an 8.25% nominal annual rate. Use the following statements to see the effect of making uniform prepayments of $500 with periodic payment:

   proc loan start=1992:12 rate=8.25 amount=240000 life=360;
      fixed label='No prepayments';
      fixed label='With Prepayments' prepay=500 ;
      compare at=(120) taxrate=33 marr=4 all;
   run;

Output 13.3.1: Loan Summary Reports and Loan Comparison Report

The LOAN Procedure

Fixed Rate Loan Summary No prepayments
Downpayment	0.00	Principal Amount	240000.00
Initialization	0.00	Points	0.00
Total Interest	409094.17	Nominal Rate	8.2500%
Total Payment	649094.17	Effective Rate	8.5692%
Pay Interval	MONTHLY	Compounding	MONTHLY
No. of Payments	360	No. of Compoundings	360
Start Date	DEC1992	End Date	DEC2022

Rates and Payments for No prepayments
Date	Nominal Rate	Effective Rate	Payment
DEC1992	8.2500%	8.5692%	1803.04

The LOAN Procedure

Fixed Rate Loan Summary With Prepayments
Downpayment	0.00	Principal Amount	240000.00
Initialization	0.00	Points	0.00
Total Interest	183650.70	Nominal Rate	8.2500%
Total Payment	423650.70	Effective Rate	8.5692%
Pay Interval	MONTHLY	Compounding	MONTHLY
No. of Payments	184	No. of Compoundings	184
Start Date	DEC1992	End Date	APR2008

Rates and Payments for With Prepayments
Date	Nominal Rate	Effective Rate	Payment
DEC1992	8.2500%	8.5692%	2303.04

The LOAN Procedure

Loan Comparison Report Analysis through DEC2002
Loan Label	Ending Outstanding	Present Worth of Cost	Payment	Interest Paid	True Rate
No prepayments	211608.05	268762.31	1803.04	187972.85	5.67
With Prepayments	118848.23	264149.25	2303.04	155213.03	5.67

NOTE:

"With Prepayments" is the best alternative based on present worth of cost analysis through DEC2002.

Notice that with prepayments you pay off the loan in slightly more than 15 years. Also, the total payments and total interest are considerably lower with the prepayments. If you can afford the prepayments of $500 each month, another alternative you should consider is using a 15-year loan, which is generally offered at a lower nominal interest rate.

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