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;

Output 17.3.1: Loan Summary Reports without Prepayments

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 |

Output 17.3.2: Loan Summary Reports with Prepayments

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 |

Output 17.3.3: Loan Comparison Report

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. |

Output 17.3.1 through Output 17.3.3 illustrate the Loan Summary Reports and the Loan Comparison report. 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.