The PMT function in Microsoft Excel is a financial function that calculates the periodic payment required to pay off a loan or annuity with a fixed interest rate over a specified number of periods. It is a commonly used function for those who need to calculate loan payments, mortgage payments, or other types of periodic payments.
The PMT function has the following syntax:
PMT(rate, nper, pv, [fv], [type])
Where:
- rate: The interest rate of the loan or annuity. This value must be entered as a decimal, not a percentage. For example, if the interest rate is 5%, the rate value would be entered as 0.05.
- nper: The total number of payments to be made over the life of the loan or annuity.
- pv: The present value of the loan or annuity. This is the amount that needs to be paid off, or the principal.
- fv (optional): The future value of the loan or annuity. This is the amount that will be left over after all the payments have been made. If this value is not provided, it is assumed to be zero.
- type (optional): A value that specifies when the payment is made. If this value is not provided, it is assumed to be zero. A value of 0 indicates that the payment is made at the end of each period, and a value of 1 indicates that the payment is made at the beginning of each period.
Using the PMT function, you can easily calculate the payment required to pay off a loan with a fixed interest rate over a specific number of periods. For example, if you have a loan with a principal of $100,000, an interest rate of 5%, and a term of 30 years (360 months), you can use the PMT function to calculate the monthly payment required to pay off the loan.
To do this, you would enter the following formula into a cell in Excel:
=PMT(0.05/12, 360, 100000)
The result of this formula would be the monthly payment required to pay off the loan, which in this case would be $536.82.
One of the benefits of the PMT function is that it allows you to easily compare different loan scenarios and see how they would affect your monthly payment. For example, you can see how increasing or decreasing the interest rate or loan term would impact the monthly payment.
To compare different loan scenarios, you can use the PMT function in combination with the IF function. The IF function allows you to specify different calculations based on a condition. For example, you can use the IF function to calculate the monthly payment for a loan with a 5% interest rate if the loan term is 30 years, and a different calculation for a loan with a 6% interest rate if the loan term is 20 years.
To do this, you would enter the following formula into a cell in Excel:
=IF(A1=30, PMT(0.05/12, 360, 100000), PMT(0.06/12, 240, 100000))
Where A1 is a cell that contains the loan term. If the value in A1 is 30, the formula will calculate the monthly payment for a loan with a 5% interest rate and a 30-year term. If the value in A1 is not 30, the formula will calculate the monthly payment for a loan with a 6% interest rate and a 20-year term.