Documentation Guide
for
Loan Comparison
August 2001
Loan Comparison: Program Overview
The loan comparison analysis program is used to compare two (or more) loan alternatives that
may differ in terms of their interest rates, fees and costs, payment schedules, variable rate
features, and other terms. Additionally, it can be used to evaluate a refinancing alternative
against an existing loan. These two options will be explained separately.
Upon entering the required inputs, three types of reports are produced: cash flow reports for both
loans, input and output summaries comparing data for both loans, and graphs showing the
present values of the outflows for both loans, as well as the present value benefits of the
preferred loan.
The information needed to run this program can come from:
1.
An individual’s farm records.
2.
Approved loan information from bank.
3.
Current loan records (including balance, interest rate, and schedule of interest and
principal payments).
To make use of this program, you must be able to provide financial and tax information. Below is
a list of the required information needed for each section.

For the loan comparison alternative, the following information is required: loan terms,
rate terms, and fees and costs for both of the loans, marginal tax rate, discount rate, and
the evaluation horizon.

For the refinancing alternative, the following information is required: current loan
information, loan terms, rate terms, fees and costs for both of the loans, marginal tax
rate, discount rate, and the evaluation horizon.
Navigating the Loan Comparison Analysis program
The Loan Comparison Analysis program has a set of buttons and pull-down tabs that help the
user move navigate among screens and reports. The navigation tools are shown below.
The compare two loans button takes you to the input screens where all applicable information
about the two loans is entered.
The evaluate refinancing button takes you to the input screens where all applicable information
about the current loan and potential new loan is entered.
The drop-down tab entitled “select report to print” is used for printing the output reports. This is
done by clicking on the arrow, scrolling down to the report you’d like to print until it is highlighted,
and then clicking on it.
The drop-down tab entitled “select report to view” is used for accessing the output reports, such
that they appear on the computer screen. This is done by clicking on the arrow, scrolling down to
the report you’d like to print until it is highlighted, and then clicking on it.
There are tabs at the bottom of the Excel spreadsheet screen that help navigate the user
between the input and output worksheets. Click on the name of the screen you wish to view.
The tabs are called:
Main Loan Compare takes you to the main menu. The main menu screen is shown above.
Alternative 1 takes you to the cash flow output report for the first of the two loans being
analyzed.
Alternative 2 takes you to the cash flow output report for the second of the two loans being
analyzed.
Summary takes you to the output report that provides a comparison of the inputs and outputs for
each loan, as well as charts and diagrams.
How to use the Input Sections
To explain the input required to use this program, a case study of Farmer’s State Bank vs.
Farmer’s National Bank has been developed. As you read, the case study is presented such that
the input sections are filled in.
This program contains two different analysis options: compare two loans and evaluate
refinancing.

The “compare two loans” option was developed to help you decide which of two loans is
financially preferred when you have two financing options available for an upcoming
purchase.

The “evaluate refinancing” option was developed to help you decide to keep a current
loan or refinance. The idea of refinancing can be triggered by a number of causes. One
common reason for refinancing is because interest rates drop. By refinancing, the
amount of interest due is reduced, leading to reduced payments.
The analysis options will be explained in two different sections of this documentation. Each
section will contain a complete description of the inputs required, as well as the output reports
generated. Some of the information may be repetitive between the two sections; however, an
entire explanation from start to finish is helpful.
Section 1: Compare Two Loans
The “compare two loans” section collects the terms, costs, and fees associated with the two loans
that are being considered for a new purchase. A visual and numerical comparison of the present
values and cash flows for each loan is generated.
There is one input screen that contains 4 tabbed input sections, as well as a calculation section.
The tabbed input sections are labeled:
 Loan Terms;
 Variable Rate Terms;
 Fees and Costs;
 Analysis Information.
The calculation section of the input worksheet is called Effective Rate and Net Present Value.
Each of these sections is described in the following text.
Input Screen 1: Loan Terms
The loan name input is used for naming the two loans that will be compared. This is
helpful when comparing the loans on charts and diagrams.
For each loan, enter the loan amount, the interest rate, the number of years to maturity,
and number of payments per year.
As the inputs are entered, the payments per period for each loan are calculated. This is a
useful comparison when considering how each loan will affect your cash flows.
The program calculates first period interest for each loan. However, no interest may be
due in the first month or the user may choose to make an additional payment on the interest
section of the loan at this time. To change the amount of first period interest (different from
default), simply type the amount of first period interest in the box containing the word
“default”.
Case Study Example: Farmers State Bank vs. Farmers National Bank
Tim and Kim Keller would like to purchase 150 acres of farmland for $3000 per acre. Tim
and Kim visit with the two local banks to inquire about their financing options. The Farmers
State Bank approved a loan for 85% of the cost at an interest rate of 7.5% requiring one
payment per year, while the Farmers National Bank approved a loan for 85% of the cost at
an interest rate of 7.0% requiring 4 payments per year. Both loans are for 15 years.
Input Worksheet 2: Variable Rate Terms
Select variable rate or fixed rate for each loan. If variable rate is
chosen, a white box will appear next to the needed information for that
loan.
The number of periods before next adjustment refers to the number of
payments due before the first interest rate adjustment is implemented.
The number of periods between adjustments refers to the number of
payments due between interest rate adjustments.
The maximum adjustment per period refers to the maximum interest
rate change that can occur in an adjustment period.
The lifetime rate caps section for each variable rate loan requires a
minimum rate and maximum rate. These rates are the boundaries for
the interest rate scale related to this loan.
The per period interest rate change refers to how much the interest
rate can be changed per period.
Case Study (Continued)
Both of the loans have a fixed interest rate.
Input Worksheet 3: Fees and Costs
For each loan, enter the deductible first year and/or
amortized points and fees, when applicable. Deductible-first
year refers to a required fee or point that is tax deductible in
the first year of the loan. For an amortized fee or point, the
amount allowed for deductions each year is total cost of the
fee or point equally divided between the numbers of years of
the loan. For example, a deductible $1000 amortized fee for
a 5-year loan would allow a $200 deduction for 5 years,
instead of a $1000 deduction in year 1.
Also, enter the nondeductible points and fees, if applicable.
Case Study (continued)
Both banks require a $1000 payment at closing. However,
Farmer’s National Bank requires a deductible, first year point
to ensure the lower interest rate.
Input Worksheet 4: Analysis Information
The marginal tax rate is the user’s income tax rate. An entry of 31%
means that 31% of the next dollar earned goes towards income taxes.
The “before-tax” discount rate is the opportunity cost of money. For
operations with debt, the discount rate may be a blend of debt costs and
equity capital. For farms with no debt, the discount rate may be the
return of off-farm investments (CD rate).
The evaluation horizon is the number of years the analysis will include.
For example, a loan may only be for 4 years, but the user would like to
see the financial implications over a 5-year time span. The 5 years is the
evaluation horizon.
Case Study (continued)
Tim and Kim’s marginal tax rate is 31%. Their opportunity cost of money
is represented by the return they earn with their money market account.
This return is 6.5%. Finally, they would like to have this analysis
calculated for a 15-year time span.
Calculations: Effective Rate and Net Present Value
The program calculates the before and after tax effective rates. The
effective rate takes into account all fees of the loan and differences in
compounding. Thus, it is a useful output in calculating the true cost of
each loan alternative.
The difference in the net present value of the two loans is shown in the
column of the preferred loan.
Case Study (continued)
The Farmers State Bank (Loan 1) has a 7.75% before tax effective rate
and a 5.347% after tax effective rate. The Farmers National Bank (Loan
2) has a 7.796% before tax effective rate and a 5.348% after tax effective
rate.
While Loan 1 has lower rates, Loan 2 is preferred when comparing the
loans over the 15-year evaluation horizon. Loan
The difference in the net present values of the two loans is $61,610.20.
Reports and Graphs
The Loan Comparison Analysis program contains 4 sections of reporting that provides both reports and graphs.
The sections are called:
1.
Main-Loan Compare.
2.
Alternative 1.
3.
Alternative 2.
4.
Summary.
The sections can be accessed in two ways. From the main menu, you may use the drop-down tab entitled “select
report to view”. Alternatively, you may click on the sheet tab located at the bottom of the Excel screen. The sheet
tabs are named as the sections described above.
Report 1: Main-Loan Compare
The Main-Loan Compare provides a visual and description comparison of the two loans.
The preferred loan is defined at the top of the report. The report provides the difference in the net present values
between the two loans. Net present value (NPV) is defined as “the value of future payments/expenses today”. It
is preferred to want a higher NPV in terms of worth or a lower NPV in terms of expenses. This report also explains
which loan is preferred according to the investment horizon. For example, Loan A is preferred from year 1 to 7,
while Loan B is preferred in years 7 to 10. If you plan on repaying the loan in 7 years, Loan A is the better choice.
However, if you plan on repaying the loan in 8 years, Loan B is the better choice.
Graphically, the program shows the present value of the outflows, or payments for each loan. In this case, the
higher the line, the more costly the loan is. The preferred loan is the lower of the two. The present value benefit
of Loan 1 for the given investment horizon is graphically shown also. This graph shows the monetary value
comparison for Loan 1 and Loan 2, in terms of Loan 1. In this example, Loan 1 is preferred in years 1 – 7,
however, in year 7, Loan 2 is preferred. This is represented by Loan 1’s benefit values turning negative.
Report 2: Alternative 1 and Report 3: Alternative 2
The Alternative 1 and Alternative 2 reports provides both a summary of the inputs entered for the loan, as well as a
payment schedule for the loan. This payment schedule includes: balance, payment amount, the amount of the
payment that goes towards interest, the amount of the payment that goes towards the principal, and the ending
balance after accounting for the payment.
Included in this report are: lifetime interest paid, deductible costs (when applicable), first year nondeductible costs
(when applicable), after-tax cash outflow, present value, and cumulative present value with loan.
Report 4: Summary
The summary report provides a numerical side-by-side view of the inputs and outputs for each
loan.
The two graphs below are similar to the graphs in the “Main-Loan Compare” report. The top
graph provides an explanation of which loan is recommended for the length of the evaluation
horizon. Also included is the difference in the net present values for each loan.
The bottom graph provides a visual of the present value of the preferred loan.
Section 2: Evaluate Refinancing
The “evaluate refinancing” section compares the terms, balance, and payments of a current loan
to the terms, costs, and fees of a new loan. This program provides a visual and numerical
comparison of the present values and cash flows for each loan.
There is one input screen that contains 5 tabbed input sections, as well as a calculation section.
The tabbed input sections are entitled:
 Current Loan
 Loan Terms
 Variable Rate Terms
 Fees & Costs
 Analysis Information
The calculation section of the input worksheet is called Effective Rate and Net Present Value.
Each of the sections is described in the following text.
Input Worksheet 1: Current Loan
The current loan balance is the unpaid portion of the loan.
For the current loan, enter the loan balance, the interest rate, the number of
payments per year, the number of years remaining on the loan, and the payment
per period.
The solve button is located next to four of the five inputs. It will calculate the
information that is left blank, assuming the other four are filled in. This is helpful if you
know the amount you owe each period, but are unsure of the remaining balance on the
loan.
Case Study Example: Farmers State Bank vs. Farmers National
Bank
Tim and Kim Keller purchased land 3 years ago and financed the purchase with a loan
from Farmers State Bank at an interest rate of 7.75% for 15 years making 1 payment
per year. The current balance is $315,000.
Input Worksheet 2: Loan Terms
The loan name input is used for naming the two loans that will be compared. This is
helpful when comparing the loans on charts and diagrams. Loan 1 is the Current Loan.
For the new loan, enter the loan amount, the interest rate, the number of years to
maturity, and number of payments per year.
As the inputs are entered, the program calculates the payments per period for each loan.
This is a useful comparison when considering how each loan will affect your cash flows.
The program calculates first period interest for the new loan. However, no interest may
be due in the first month or the user may choose to make an additional payment on the
interest section of the loan at this time. To change the amount of first period interest
(different from default), simply type the amount of first period interest in the box containing
the word “default”.
Case Study (Continued)
Recently, interest rates have dropped and the Farmers National Bank has offered Tim and
Kim the chance to refinance their loan. The offer includes: a loan for $315,000, a 1% lower
interest rate, and the choice to make 2 payments per year.
Input Worksheet 3: Variable Rate Terms
Select variable rate or fixed rate for each loan. If variable rate is
chosen, a white box will appear next to the needed information for that
loan.
The number of periods before next adjustment refers to the number of
payments due before the first interest rate adjustment is implemented.
The number of periods between adjustments refers to the number of
payments due between interest rate adjustments.
The maximum adjustment per period refers to the maximum interest
rate change that can occur in an adjustment period.
The lifetime rate caps section for each variable rate loan requires a
minimum rate and maximum rate. These rates are the boundaries for
the interest rate scale related to this loan.
The per period interest rate change refers to how much the interest
rate can be changed per period.
Case Study (Continued)
Both of the loans have a fixed interest rate.
Input Worksheet 4: Fees and Costs
For the new loan, enter the deductible first year and/or
amortized points and fees, if applicable.
Also, enter the nondeductible points and fees, if applicable.
Case Study (continued)
The new loan has no deductible or nondeductible points or
fees.
Input Worksheet 5: Analysis Information
The marginal tax rate is the user’s income tax rate. An entry of 15%
means that 15% of the next dollar earned goes towards income taxes.
The “before-tax” discount rate is the opportunity cost of money. For
operations with debt, the discount rate may be a blend of debt costs and
equity capital. For farms with no debt, the discount rate may be the
return of off-farm investments (CD rate).
The evaluation horizon is the number of years the analysis will include.
For example, a loan may only be for 4 years, but the user would like to
see the financial implications over a 5-year time span. The 5 years is the
evaluation horizon.
Case Study (continued)
Tim and Kim’s marginal tax rate is 31%. Their opportunity cost of money
is represented by the return they earn with their money market account.
This return is 6.5%. Finally, they would like to have this analysis
calculated for a 15-year time span.
Calculations: Effective Rate and Net Present Value
For each loan, the program calculates the before and after tax rates.
The before-tax rate is important because…. The
The after-tax rate is important because…. The loan with the lower tax
rates is the preferred loan.
The net present value of the preferred loan is provided. This is
important to know because….
Case Study (continued)
The Farmers State Bank (Loan 1)
The Farmers National Bank (Loan 2)
The Farmers National Bank is the preferred loan. The net present value
is $11,435.30.
Reports and Graphs
The Evaluate Refinancing program contains 4 sections of reporting that provides both reports and graphs. The
sections are called:
1. Main-Loan Compare.
2. Alternative 1.
3. Alternative 2.
4. Summary.
The sections can be accessed in two ways. From the main menu, you may use the drop-down tab entitled “select
report to view”. Alternatively, you may click on the sheet tab located at the bottom of the Excel screen. The sheet
tabs are named as the sections described above.
Report 1: Main-Loan Compare
The Main-Loan Compare provides a visual and description comparison of the two loans.
The preferred loan is defined at the top of the report. The report provides the difference in the net present values
between the two loans. Net present value (NPV) is defined as “the value of future payments/expenses today”. It
is preferred to want a higher NPV in terms of worth or a lower NPV in terms of expenses. This report also explains
which loan is preferred according to the investment horizon. For example, Farmers National Bank is the preferred
loan throughout the analysis.
Graphically, the program shows the present value of the outflows, or payments for each loan. In this case, the
higher the line, the more costly the loan is. The preferred loan is the lower of the two. The present value benefit
of Loan 1 for the given investment horizon is shown also. This graph shows the monetary value comparison for
Loan 1 and loan 2, in terms of Loan 1. In this example, Loan 1 (Farmers State Bank) is not preferred during any of
the analysis. This is shown by the negative values.
Report 2: Alternative 1 and Report 3: Alternative 2
The Alternative 1 and Alternative 2 reports provides both a summary of the inputs entered for the loan, as well as a
payment schedule for the loan. This payment schedule includes: balance, payment amount, the amount of the
payment that goes towards interest, the amount of the payment that goes towards the principal, and the ending
balance after accounting for the payment.
Included in this report are: lifetime interest paid, deductible costs (when applicable), first year nondeductible costs
(when applicable), after-tax cash outflow, present value, and cumulative present value with loan.
Report 4: Summary
The summary report provides a numerical side-by-side view of the inputs and outputs for each
loan.
The two graphs below are similar to the graphs in the “Main-Loan Compare” report. The top
graph provides an explanation of which loan is recommended for the length of the evaluation
horizon. Also included is the difference in the net present values for each loan.
The bottom graph provides a visual of the present value of the benefit of Loan 1.