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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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Copyright © 1999 by SAS Institute Inc., Cary, NC, USA. All rights reserved.