LOAN Procedure
Example 22.3 Prepayments on a Loan
(View the complete code for this example.)
This example compares a 30-year loan with and without prepayments. Assume the $240,000 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;
Figure 13 through Figure 15 show the loan summary reports and the loan comparison report.
Figure 13: Loan Summary Reports without Prepayments
| 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 |
Figure 14: Loan Summary Reports with Prepayments
| 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 |
Figure 15: Loan Comparison Report
| 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.