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PMT: Calculating a loan payment

From: Excel 2010: Financial Functions in Depth

Video: PMT: Calculating a loan payment

Most loans, whether between businesses or made by businesses to individual borrowers, are fully amortized. Fully amortized means that the monthly payments made over the term of the loan pay off the principal and all of the accrued interest. In Excel, you can calculate the monthly payments required to pay off a fully amortized loan by using the PMT function. I've set up this workbook so that it has all the arguments that we need for the PMT function to calculate our monthly payment. First is the Rate and this is exactly what you would expect, the annual interest rate.

PMT: Calculating a loan payment

Most loans, whether between businesses or made by businesses to individual borrowers, are fully amortized. Fully amortized means that the monthly payments made over the term of the loan pay off the principal and all of the accrued interest. In Excel, you can calculate the monthly payments required to pay off a fully amortized loan by using the PMT function. I've set up this workbook so that it has all the arguments that we need for the PMT function to calculate our monthly payment. First is the Rate and this is exactly what you would expect, the annual interest rate.

Next is the Number of periods and that's just the number of payments that you need to make. In this case, it's 12 payments a year over 30 years for 360 payments. Then we have the Present value and that is the amount that you owe and you'll notice that it is represented as a negative number because, as I said, it's the amount that you are owing. Next is the Future value of the loan and this is the amount that you want to end up with after you make your payments. And because this is a fully amortized loan that value is 0. And then finally, you have the Type of payment you're going to be making and that can either be 0 or 1.

If it's 0, you make your payment at the end of a period, for example the last day of the month. If the Type is 1 then you're making your payment at the beginning of a period. That is the first day of the month. So 1 would be May 1st and 0 would be May 30th. So with that information in hand, we can create our PMT function and to do that, just type an equal sign and then pmt and left parenthesis and then we can start identifying the cells that contain the values.

The rate is in cell c3, but because it's an annual rate and we're going to be making monthly payments, we need to divide it by 12. So /12 and then a comma, then we have a number of periods which is in c4, comma, present value is in cell c5, comma, and then if you look at the tooltip underneath the formula that I'm entering, you'll see that the future value and type arguments are enclosed in square brackets. The square brackets indicate that those arguments are optional.

You don't have to provide a value for them. In this case, Excel would assume that the future value is 0 and that the type is also 0, but because this is the first time through I'll go ahead and add those arguments just for completeness. So future value is in c6, comma, and type is in c7. Type a right parenthesis and check over the formula. Everything looks good. Press Enter and we see that our monthly payment will be a little bit over $3100.

Now let's see how that would change if we made our payment at the beginning of a period instead of at the end. To do that, we change the Type from 0 to 1. So our payment in cell C10 is a little bit over $3100. Change the Type to 1 to pay at the beginning of the month and it goes down by about $14. Now that doesn't seem like a lot, but over 360 payments it comes out to a bit over $3750. The PMT function only calculates a monthly payment to cover principal and interest.

Many loans have other charges included such as property taxes and perhaps private mortgage insurance. So you should be sure to include those other fees and charges when you calculate your loan payments.

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This video is part of

Image for Excel 2010: Financial Functions in Depth
Excel 2010: Financial Functions in Depth

52 video lessons · 13313 viewers

Curt Frye
Author

 
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  1. 2m 11s
    1. Welcome
      1m 6s
    2. Using the exercise files
      36s
    3. Disclaimer
      29s
  2. 28m 32s
    1. PMT: Calculating a loan payment
      3m 31s
    2. PPMT and IPMT: Calculating principal and interest per loan payment
      4m 18s
    3. CUMPRINC and CUMIPMT: Calculating cumulative principal and interest paid between periods
      4m 30s
    4. ISPMT: Calculating interest paid during a specific period
      2m 13s
    5. EFFECT and NOMINAL: Finding nominal and effective interest rates
      3m 31s
    6. ACCRINT and ACCRINTM: Calculating accrued interest for investments
      4m 15s
    7. RATE: Discovering the interest rate of an annuity
      2m 41s
    8. NPER: Calculating the number of periods in an investment
      3m 33s
  3. 19m 5s
    1. SLN: Calculating depreciation using the straight-line method
      1m 48s
    2. DB: Calculating depreciation using the declining balance method
      3m 10s
    3. DDB: Calculating depreciation using the double-declining balance method
      3m 20s
    4. SYD: Calculating depreciation for a specified period
      2m 13s
    5. VDB: Calculating declining balance depreciation for a partial period
      3m 24s
    6. AMORDEGRC: Calculating depreciation using a depreciation coefficient
      2m 27s
    7. AMORLINC: Calculating depreciation for each accounting period
      2m 43s
  4. 22m 33s
    1. FV: Calculating the future value of an investment
      2m 48s
    2. FVSCHEDULE: Calculating the future value of an investment with variable returns
      2m 21s
    3. PV: Calculating the present value of an investment
      2m 6s
    4. NPV: Calculating the net present value of an investment
      3m 17s
    5. IRR: Calculating internal rate of return
      2m 33s
    6. XNPV: Calculating net present value given irregular inputs
      2m 32s
    7. XIRR: Calculating internal rate of return for irregular cash flows
      1m 48s
    8. MIRR: Calculating internal rate of return for mixed cash flows
      2m 2s
    9. DISC: Calculating the discount rate of a security
      3m 6s
  5. 24m 12s
    1. COUPDAYBS: Calculating total days between coupon beginning and settlement
      3m 2s
    2. COUPDAYS: Calculating days in the settlement date's coupon period
      2m 48s
    3. COUPDAYSNC: Calculating days from the settlement date to the next coupon date
      3m 1s
    4. COUPNCD: Calculating the next coupon date after the settlement date
      2m 43s
    5. COUPNUM: Calculating the number of coupons between settlement and maturity
      2m 55s
    6. COUPPCD: Calculating the date of a coupon due immediately before settlement
      3m 4s
    7. DURATION: Calculating the annual duration of a security
      3m 20s
    8. MDURATION: Calculating the duration of a security using the modified Macauley method
      3m 19s
  6. 28m 43s
    1. DOLLARDE and DOLLARFR: Converting between fractional prices and decimal prices
      2m 36s
    2. INTRATE: Calculating the interest rate of a fully invested security
      2m 50s
    3. RECEIVED: Calculating the value at maturity of a fully invested security
      2m 46s
    4. PRICE: Calculating the price of a security that pays periodic interest
      3m 19s
    5. PRICEDISC: Calculating the price of a discounted security
      2m 48s
    6. PRICEMAT: Calculating the price of a security that pays interest at maturity
      1m 57s
    7. TBILLEQ: Calculating the bond-equivalent yield for a Treasury bill
      1m 50s
    8. TBILLPRICE: Calculating the price for a Treasury bill
      1m 31s
    9. TBILLYIELD: Calculating the yield of a Treasury bill
      1m 41s
    10. YIELD: Calculating the yield of a security that pays periodic interest
      2m 59s
    11. YIELDDISC: Calculating the annual yield for a discounted security
      2m 9s
    12. YIELDMAT: Calculating the annual yield of a security that pays interest at maturity
      2m 17s
  7. 12m 1s
    1. ODDFPRICE: Calculating the price of a security with an odd first period
      3m 17s
    2. ODDFYIELD: Calculating the yield of a security with an odd first period
      3m 3s
    3. ODDLPRICE: Calculating the price of a security with an odd last period
      2m 44s
    4. ODDLYIELD: Calculating the yield of a security with an odd last period
      2m 57s
  8. 1m 5s
    1. Additional resources
      1m 5s

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