In this chapter, I argued that the best choice for a loan is the loan with the lowest present value, subject to the constraint that you have to be able to afford the payments. We could consider a fi gure of merit (FM) for a loan as the product of the present value and the monthly payment — when both of these factors are low, the FM will be low; when both are high, the FM will be high; and intermediate cases will fall somewhere in between.

Using the data in Table 8.2 , calculate the FM for each loan and discuss whether or not this FM defi nition is good.

In the table, I got the FMs by multiplying the PV by the Monthly Payment and then dividing by 10,000,000. These divisions don ’ t change the relative values of the FMs, but they do make it a lot easier to read the signifi cant fi gures of the numbers without getting distracted by all of the digits .

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Nr Pmts Loan rate Savings rate PV ($) (%) (%) Monthly payment ($) Figure of merit 120 6.00 3.50 392,950 3,886 120 7.00 3.50 410,958 4,064 120 8.00 3.50 429,431 4,246 240 6.00 3.50 432,359 2,508 360 6.00 3.50 467,309 2,098 240 7.00 3.50 467,885 2,714 240 8.00 3.50 504,783 2,928 360 7.00 3.50 518,558 2,329 360 8.00 3.50 571,920 2,568