Calculating Loan Payments

Few people can make it though life without taking out one or more loans. By extending payments over a period of time, a loan enables you to buy something now that otherwise you would have to save for over a long time. Big ticket items, such as a car or house, are perhaps the most common uses of loans.

When evaluating a loan, most people ask, “Can I afford the payments?” The overall price is not the issue, some people think, but whether the monthly payment will fit into the budget. The amount of the monthly payment depends on the three parameters of any loan:

• The principal, or amount you are borrowing

• The interest rate

• The term, or length of the loan

Larger principal, higher interest rate, and shorter term all lead to higher payments.

You should be aware that judging a purchase solely on the monthly payments is not a good idea. Lower monthly payments might seem attractive now, but all other things being equal, they mean you will pay more over the long run for whatever you are buying. Keeping this caveat in mind, you can make decisions based on Excel’s loan-related calculations.

You can use Excel’s PMT function to calculate the payment on a loan. This function is applicable only to loans where the payment amount is fixed for the length of the loan. Most mortgages and auto loans fall into this category. It is not applicable for credit card payments.

Taken From : Manage Your Money and Investments with Microsoft Excel

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