While taking a loan from a bank or a financial institution, our primary concern is how much we have to make periodic payment (monthly, quarterly, annually) to pay back that loan on a given interest rate and in the total number of payments. Using the Excel PMT function we calculate payment for a loan based on a constant interest rate and constant payments.
Figure 1. Calculating Payment For a Loan in Excel
The syntax for the formula to calculate payment for a loan in Excel is;
=PMT(annual rate/compounding periods, total payments, loan amount)
=PMT(rate, nper, pv, [fv], [type])
- Rate (required argument): A constant interest rate
- Nper (required argument): The Total number of payments or periods
- PV (required argument): Present value or the loan amount
There are two optional arguments;
- FV (optional argument): Future value of loan amount after all payments are made. Use $0 if not known or omit this argument.
- Type (optional argument): To specify whether the payment is due at the beginning or end of the period, like at the beginning or end of the month. Use “1” for the beginning of the period and “0” for the end of the period. The default is “0”
Figure 2. The Syntax of the Formula
Assume we need to borrow $30,000 at 8% annual interest rate for 5 years on monthly payment terms. We can calculate the monthly payment for this loan amount using the following formula assuming the monthly payment is due at the end of the month;
Figure 3. Using the PMT Function to Calculate Payment For a Loan
As the constant interest rate is annual, so we have to convert it into monthly interest rate by dividing it to 12 (compounding periods per year). The loan period is 5 years and payments for the loan are monthly, therefore the total number of payments would be 60 (12*5). The PMT function returns payment for the loan as a negative value to represent the cash outflow, such as;
Figure 4. Final Preview of Formula to Calculate Payment For a Loan
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