Calculating Loan Payments (2)

The PMT function uses the following syntax:

PMT(rate, nper, prin, [fv, type])

The first three arguments are required. They are

• rate is the interest rate for the loan.

• nper is the term of the loan expressed as the number of payment periods.

• prin is the principal, the amount you are borrowing.

When using PMT in a worksheet, it is essential that rate and nper use the same time units. What does this mean? Because most loans have monthly payments, you would have to express nper in months. For example, a five-year loan would have a term of 5 x 12 or 60 months. However, interest rate is always expressed by banks and loan companies as an annual rate. For the function to work correctly, rate must be per period, in this case the rate per month. This is easily obtained by dividing the annual interest rate by 12.

The last two arguments are optional (as indicated by the brackets in the formula):

• fv is the future value of the loan, or the amount still owed when you have completed payments. Because loans are almost always paid off in full, you will use 0 for this argument or omit it, in which case Excel assumes 0.

• type indicates when payments are made. Use a value if 1 if payments are made at the start of each period. Use a value of 0, or omit the argument, if the payment is made at the end of each period (the case for most loans).

Taken From : Manage Your Money and Investments with Microsoft Excel

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