IPMT: Google Sheets formulas explained
Hey everyone! Today, I want to talk about something that has revolutionized the world of spreadsheet calculations – IPMT. If you use Google Sheets regularly (like I do), you likely know about this formula and the wonders it can create. However, if you're new to the world of spreadsheets, let me introduce you to one of the most potent calculator functions ever created.
In this article, I will explain to you what IPMT is, how it works, and how you can use it to create complex financial models. Being a marketing professional, you might wonder how spreadsheets can help you, but believe me, it's vital to be familiar with this formula. Ready to dive in? Let's get started.
What is IPMT?
Imagine you want to buy a home but don't have enough money to pay cash upfront, or you don't want to drain all your savings. A mortgage is an excellent way to finance your purchase by providing you with the necessary funds to buy the home and paying back the loan over a predetermined period.
Here's where IPMT comes in. IPMT stands for ‘Interest Payment’, the amount of interest you pay on top of the principal amount when repaying a loan. In simpler terms, IPMT is a financial function that calculates the interest payment of a loan at a given payment period based on the fixed interest rate, along with the outstanding principal amount due at that period.
How IPMT works
IPMT requires several inputs to calculate the interest payment for each payment period. These include:
- The fixed interest rate of the loan
- The number of the payment period you want to calculate the interest payment for
- The total number of payment periods to repay the loan
- The amount of the loan, i.e., its principal
- The future value of the loan (if any)
- Annuity due (if monthly payments are made at the beginning of each month)
For example, if you have taken a loan of $200,000 for ten years with an annual interest rate of five percent, the IPMT formula would calculate the interest payment for the first and subsequent years. IPMT is an incredibly versatile formula and can be adjusted to calculate interest payments for monthly, quarterly, bi-annual, or annual payments.
Here's the mathematic formula for IPMT in Google Sheets:
Let's break each element down.
- Rate: It's the interest rate charged per period. In our example, it's five percent per annum.
- Per: Period refers to the specific payment period you want to calculate the interest payment for.
- Nper: The total number of the payment period to repay the loan. In our example, it’s ten years, or 120 payments if payments are monthly.
- Pv: It's the present value or the loan amount you want to calculate the interest payment on.
- Fv: An optional argument representing the future value or the principal of the loan, which is zero in most cases.
- Type: An optional argument with only two possible values – 0 or 1. By default, this value is zero, which represents payments made at the end of each period. If payments are made at the beginning of each month, set this parameter to 1. This switch is essential when calculating annuity payment for loans paid in advance.
How to use IPMT
Now, let's put IPMT into action: you're buying a car valued at $20,000 and are taking a loan for five years with an interest rate of eight percent. You plan to pay monthly, and the loan will be fully repaid at the end of the five-year term.
Your first step is to calculate the monthly payment, which is the sum of interest and principal paid each month, using the PMT (Payment) formula.
This formula calculates your monthly payments to be $405.35 to repay the loan at the end of the five years term.
Next, you can use the IPMT function to calculate the amount of interest you will pay each month over a five-year period. To calculate the interest on the first payment, you would enter the following formula:
This formula calculates the interest amount paid in the first month, which amounts to $133.33. You can repeat this calculation for every month until the final payment.
IPMT is an essential formula to understand when working with loans or mortgages. By calculating the interest payment, you can quickly determine how much you'll be paying back for the loan, which helps you budget better and avoid any surprises later.
I urge you to experiment with IPMT and see how powerful this formula can be in helping you make informed financial decisions. From calculating interests paid on loans to determining the returns on your investment portfolio - IPMT can do it all.
Thank you for reading, and I hope this article has been helpful to you. If you have any feedback or thoughts you'd like to share, I’d love to hear from you!