Demonstration Calculation: Testing a Credit Deal for Efficiency
A methodological breakdown of how to test a credit transaction by the structure of its economic burden — and how, on a single asset, to show the difference between a sound and a flawed deal.
Methodology
1.Core Principle
Most people compare the monthly loan payment with the market rental rate — and stop there. But these two figures belong to different logical levels, and neither tells you whether the deal has any economic justification.
The Problem with the Conventional Comparison
The loan payment reflects the bank's risk, not the real cost of the asset in use. Beyond interest and fees, the borrower carries maintenance, depreciation, and the opportunity cost of frozen own capital.
Market rent is not neutral either. It is shaped by market conditions: the landlord aims to maximise short-term gain, not the balance of mutual interests. It is a price, not a measure.
Placing these two figures side by side is comparing apples and oranges. A choice built on two flawed alternatives inevitably remains incomplete and methodologically biased.
The Third Figure: Balanced Rent (BR)
The Balanced Rent (BR) is a calculated rental rate derived from the asset itself, not from the market and not from the bank's terms. It sits at the equilibrium of two boundaries:
High enough for the landlord — covers wear, depreciation, and a fair return, so that owning the asset remains economically worthwhile.
Low enough for the tenant — so that the charge for use remains reasonable and does not become a one-sided burden.
BR is an independent benchmark of the economic value of using the asset. That is exactly the right reference point for testing a credit deal.
How the Calculator Works
Computes BR from the asset parameters and operating conditions.
Sums the total economic burden of the loan: interest paid to the bank plus the opportunity cost of own funds. Principal repayment is not a cost: it builds your equity in the asset.
Computes the efficiency coefficient K = BR ÷ total economic burden.
K = BR ÷ (Savings depreciation + Bank interest)
Interpreting the Result
K ≥ 1 — the credit burden falls within an economically justified corridor. The deal has a real economic basis. The borrower is not overpaying for an illusion of help.
K < 1 — the credit burden exceeds what balances the interests of the parties. The deal is dictated by market noise rather than by equilibrium — structurally inefficient. Better to reconsider the terms.
Notation
2.Indicators and Symbols
Every quantity used in the assessment is denoted by a symbol and has a name, formula, and unit.
Symbol
Indicator
Formula / meaning
w
Cost of the asset financed
input · currency
pr
Loan interest rate
% per annum
dep
Alternative investment return
% per annum
t₁ / t₂ / t
Preparation term / operating term / total term
t = t₁ + t₂ · months
a
Down payment
% of cost
rem
Improvement investment
% of cost
dr
Other liabilities
currency / month
ra
Market rent
currency / month
dol
Share of liabilities in budget
%
salog
Collateral / pledge
currency
Derived quantities
Symbol
Indicator
Formula
ii
Down payment
ii = w·a / 100
ir
Improvement investment
ir = w·rem / 100
Σᵢ (sumi)
Total initial investment
sumi = ii + ir
k
Loan principal
k = w − ii
kred
Monthly payment
annuity on k, pr, t
sumrem
Asset depreciation / month
sumi / t₂
proz
Bank interest + insurance / month
kred + dr − k/t
depm2
Savings depreciation / month
(sumi·fvf − sumi)/t
fvf
Accumulation factor
(1+dep/12)^t
Στ (totreq)
Total economic burden / month
proz + depm2
BR (ar)
Balanced rent
derived from the balance condition = 1
Indicators
Symbol
Indicator
Formula
Criterion
K
Efficiency coefficient
BR ÷ Στ
K ≥ 1 — deal justified K < 1 — not justified
A
Market-conditions coefficient
ra ÷ BR
A ≈ 1 — market is fair A < 1 — market is undervalued
B
Match index
BR ÷ kred
simple ratio
ID
Indicative income
(kred + dr + sumrem) ÷ dol
income the deal requires
Bal
Balance of forces
tenant capital ÷ rent
= 1,000 — equilibrium
Case · two balanced deals
3.Terms of the Two Deals
Both are brought to Balance = 1,000. They differ in cost, term and, as a result, in justification. This is the same market rent (ra = 1 111/month), the same household.
Deal 1 · PERMISSIBLE
w = 90 000 · t = 91
Aligned with balance and market
Deal 2 · WANTED / BANK OFFERS
w = 200 000 · t = 240
"Bigger and longer"
Calculation · stage 1
4.Asset and Borrower Parameters
Indicator
Deal 1
Deal 2
w
90 000
200 000
a / rem
20% / 10%
20% / 10%
Σᵢ
27 000
60 000
k
72 000
160 000
t₁ / t₂
12 / 79
0 / 240
pr / dep
17% / 13%
17% / 13%
ra · dol
1 111 · 40%
1 111 · 40%
Calculation · stage 2
5.Total Economic Burden
Indicator
Symbol
Deal 1
Deal 2
Monthly payment
kred
1 412,75
2 346,88
Asset depreciation / month
sumrem
341,77
250,00
Total monthly commitments
kred+dr+sumrem
1 754,52
2 596,88
Bank interest + insurance / month
proz
621,54
1 680,21
Savings depreciation / month
depm2
494,27
3 069,20
Total economic burden / month
Στ
1 115,81
4 749,41
Accumulated savings
sb
71 978,58
796 607,53
Accumulated benefit (renting instead of buying)
rg
46 354,53
789 838,31
Tenant capital
rg + sb
118 333,11
1 586 445,84
Accumulation factor
fvf
2,6659
13,2768
Why Στ grows faster than the payment. In Deal 2 the loan is 2.2× larger and the term is 2.6× longer. The payment only rises 1.66× (2 346,88 vs 1 412,75), but the total burden rises 4.3× (4 749,41 vs 1 115,81). The cause is the long term: 20 years of capitalising the frozen 60 000 own funds yields 3 069,20 of forgone gain per month, against 494,27 in Deal 1. A stretched term hides the true cost behind an "affordable" payment.
Comment on accumulated savings (sb). sb is not "savings" in the everyday sense; it is the alternative value of frozen own funds: how much your money would have grown had you not spent it on the asset but invested it at rate dep over the full term t. That is why the benchmark for sb is the asset's own price w, and here is what it shows:
Sound deal: sb does not exceed the asset price. In Deal 1 sb = 71 978,58 at w = 90 000 → 0.80×. The frozen funds are proportionate to what the asset is worth. Capital locked in the asset does not "inflate" beyond its value — the deal stays in the economic corridor.
Flawed deal: sb significantly exceeds the asset price. In Deal 2 sb = 796 607,53 at w = 200 000 → 3.98×. Your money, had it stayed in circulation, would have grown nearly four times more than the asset itself is worth. You consume four times more alternative value than the asset can return — the structure is economically loss-making, and the term is more to blame than the rate.
Conclusion. sb is a quick indicator of permissibility: if accumulated savings soar to several times the asset price, the deal fails the test; if they do not exceed it, freezing the money is economically justified.
Calculation · stage 3
6.Balanced Rent and the Decisive Indicators
Indicator
Symbol
Deal 1
Deal 2
Balanced rent
BR
1 111,30
1 649,90
Market rent
ra
1 111,00
1 111,00
Market-conditions coefficient
A = ra ÷ BR
1,00
0,67
Match index
B = BR ÷ kred
0,79
0,70
Efficiency coefficient
K = BR ÷ Στ
0,996
0,347
Indicative income
ID
4 386,31
6 492,20
Balance of forces
Bal
1,000
1,000
How to read it. Both deals have Balance = 1,000 — a normalisation condition, not a verdict. The verdict comes from K and A. In Deal 2 the BR (1 649,90) is 49% above the real market (ra = 1 111), i.e. the fair price of using the asset exceeds the market price — A = 0,67. And the total burden exceeds that fair price almost threefold — K = 0,347.
Tenant capital
7.Two Flows of Tenant Capital: Accumulated Savings and Accumulated Benefit
The model builds the tenant's capital (the party assessing the deal) from two different sources. It is important not to confuse them — they answer different questions.
Indicator
What it is
Where it comes from
Formula
Accumulated savings (sb)
The alternative value of frozen own funds — how much the money would have grown had it not been spent on the asset but invested at rate dep.
Only from your invested capital (down payment + improvement). Independent of rent and payment.
sb = (Σᵢ − Collateral) · fvf
Accumulated benefit (rg)
The alternative result of choosing rent over purchase — how much you would have saved by renting: (payment + other − rent) each month, accumulated at the same rate.
From the gap between your payment/maintenance and the rental rate. Rent itself consumes part of it, so the benefit can be negative.
rg = ann · (kred + dr − rent)
How they differ.
sb — about the money you already handed over. It is the price of what you froze in the asset; it shows how much you lose at the alternative rate.
rg — about the choice "rent vs buy". It is what you gain or lose comparing the monthly cost of ownership with the rent, accumulated.
The model uses them differently: sb enters the total burden (via savings depreciation) and the tenant's capital, while rg adjusts the tenant's capital in favour of the "rental scenario" — but only for as long as it is a benefit; if renting is more expensive than owning, rg turns negative and cuts the capital.
Their benchmarks differ: sb is checked against the asset price w (sb ≤ w — permissible), while rg is checked against accumulated rent (that is the Balance). Final tenant capital = rg + sb, and it feeds into the Balance.
Illustration on the case. In Deal 1, sb (71 978,58) does not exceed the asset price (w = 90 000), and rg (46 354,53) is moderate — tenant capital 118 333,11, the deal is in the corridor. In Deal 2, both sb (796 607,53) and rg (789 838,31) are inflated to hundreds of thousands: tenant capital 1 586 445,84 — four times the asset price (w = 200 000). Both flows grew beyond measure precisely because of the long term, not because it is a better "deal" for you.
Visualisation
8.True Burden vs Fair Rent
In Deal 1 the total burden sits level with the fair rent (K ≈ 1). In Deal 2 the burden is nearly three times the fair level — what looks like "bigger and longer" is in fact an overpayment for shifting the burden into a long term.
Client conclusion
Both deals: Balance = 1,000. Verdict by K and A.
Deal 1 (90 000 · 91 mo): K = 0,996 · A = 1,00 · ID 4 386 — JUSTIFIED
Deal 2 (200 000 · 240 mo): K = 0,347 · A = 0,67 · ID 6 492 — NOT JUSTIFIED
What this means for you. Deal 1 is economically sound: its total burden (1 115,81) fits within the fair cost of using the asset, and market rent is fair (A = 1,00). Deal 2 is not: the fair cost of use (1 649,90) is above the real market, and the burden (4 749,41) exceeds it threefold. A higher income (ID 6 492 vs 4 386) only makes Deal 2 affordable, not justified — you are simply allowing yourself a structurally poor deal.
Recommendation. Choose what is economically justified, not what you "can afford". If you want a larger asset, do not stretch the term (it only hides the burden) — move the parameters that actually push K to 1 and above: lower rate, larger down payment, lower asset price. Judge the deal by K and A, not by the phrase "we can afford the payment".
How to read the indicators.K — efficiency coefficient: K ≥ 1 — deal justified, K < 1 — not justified.
A — market-conditions coefficient: A ≈ 1 — market is fair, A < 1 — fair rent above market, asset overpriced for the market.
B — match index, a simple ratio of rent to payment (not a criterion of justification).
ID — indicative income: a derived quantity, the income the deal requires from the household at a 40% share of budget; the higher it is, the more "affordable", but not more "justified".
Balance — the equilibrium point between tenant and landlord, found by solving for the rent rate; by itself it gives no verdict.
This tool is intended exclusively for analytical purposes and is not personal financial, mortgage, tax, legal or investment advice. Results depend on the accuracy of the input data.