Understanding your liabilities is crucial in the world of finance. Whether you’re a business owner, a student, or someone looking to buy something, knowing how to calculate your loan payments in Excel can be a game-changer.
Microsoft Excel offers a simple tool to make this task easier: the PMT function. This function allows you to calculate the monthly payments for a loan and make wise financial decisions.
What Is the PMT Function in Excel?
Understanding the intricacies of loan payments, such as how much you’ll be paying monthly or annually, can be daunting.Microsoft Excel is a powerful platform for financial analysis, and the PMT function is one tool that simplifies calculating loan payments.
The PMT Function is afinancial function in Excelthat returns the periodic payment amount for a loan or an investment. PMT assumes that the payments and the interest rate are constant. Although you can use PMT for both savings accounts and loans, we’ll focus on loans here. The syntax for PMT is as below:
Ensure consistency in the units used for the rate and nper arguments. For monthly payments, convert the annual rate to a monthly rate and the loan term to months.
In the case of loans, the PV or present value is equivalent to the negative of the loan amount. The positive PMT values will add to the negative PV until it equals zero. Since the objective is to pay off the loan, the FV or future value is set to zero by default when left blank.
It’s best to leave the type argument blank. This sets it to 0, meaning payments are due at the end of each period, which is the default for most loans.
How to Use the PMT Function to Calculate Loan Payments in Excel
you may use PMT to calculate the amount of period payments in any payment series, including loans. While PMT returns the payment amount on its own, with some simple formulas and tweaks, it can also help you calculate other insightful values.
Since PMT requires multiple arguments, it’s best practice to enter each argument in a separate cell and reference those cells in the function instead of inputting values directly.
Let’s start with the simple example in the spreadsheet above. Suppose you want to take a $15,000 loan with annual interest of 10% paid over five years. The interest and the payments are due at the end of every period (month), and you want to figure out how much you’ll need to pay each month.
The first step here is to figure out the arguments for PMT. In this example, the PV will be negative for the loan amount (-$15,000), the interest rate will be the monthly rate (10%/12), and the number of payments will be 60 months, equivalent to five years.
Once you figure out the arguments, you can quickly calculate the loan payments with the PMT function.
Leaving FV and type blank in this formula sets them both to zero, which suits us well. You can play around with the values to see how they affect the payments.
Calculate the Total Loan Payments
The PMT value is not all the insight you can get into your loan. A simple formula can help you get a clearer picture. The formula below determines the total amount you’ll pay over the life of the loan:
This formula multiplies the PMT value with NPER. In simpler terms, this is the fixed payment amount multiplied by the number of payments, resulting in the total amount you’ll pay.
Calculate the Total Loan Interest
Another helpful insight is the total interest of the loan. This helps you see how much you’ll be paying the bank in addition to the loan amount.
This formula subtracts the total loan payments from the loan amount. Note that since the loan amount is negative, the formula usesthe ABS functionto get the absolute value of the cell.
Using Goal Seek With PMT in Excel
So far, you’ve used PMT to determine the periodic payment amount for a loan. However, sometimes you may already have a specific PMT amount in mind, say $500 per month for a $15,000 loan. In such cases, you can use the PMT function along withExcel’s Goal Seek featureto determine the arguments that will result in the desired PMT.
This method allows you to automatically adjust different arguments until you reach the goal you have in mind for PMT. Here’s how you may do that:
Excel will now try different values for the changing cells until it reaches the PMT goal. You can also set Goal Seek to change multiple cells (e.g., interest rate and loan term) to reach the PMT goal.
If you’ve already determined the total payment and total interest for the loan, you may use them as the target cells for Goal Seek. However, it’s important not to ask Goal Seek to change the PMT value directly, as it would overwrite the formula. You can change the loan term and rate as you did before.
If you’re trying to determine the interest rate, you canuse Excel’s RATE functionto quickly calculate it. Note that the RATE function will return a fixed interest rate; you’ll need tocreate a calculator for compound interests.
Navigate Loans With Excel’s PMT Function
Understanding your financial commitments is paramount in today’s fast-paced economic environment. With Excel’s PMT function, you have a powerful tool to navigate the complexities of loan payments.
Whether you’re planning for a mortgage, car loan, or any other financial obligation, the PMT function, combined with other Excel features like Goal Seek, can provide clarity and confidence in your financial decisions. Embrace the power of Excel and take control of your financial future.
