PMT: Excel Formulas Explained

Excel is a powerful tool for data analysis and calculation, but sometimes it can be challenging to understand all of the formulas and functions at your disposal. One of the most useful formulas in Excel is the PMT function, which can help you calculate loan payments, mortgage payments, and other financial calculations. In this article, I'll explain what the PMT function is, how it works, and how you can use it in your day-to-day work.

What is the PMT function?

The PMT function in Excel is used to calculate the periodic payment for a loan with a fixed interest rate and fixed term. It stands for "payment," and it's an important function in financial modeling and analysis. With the PMT function, you can determine how much you need to pay each period to pay off a loan or mortgage over a set period.

How does the PMT function work?

The PMT function takes into account three variables: the interest rate, the number of periods, and the present value of the loan or investment. Here's how to use the PMT function in Excel:

1. Select the cell where you want to display the payment amount.
2. Type =PMT(.
3. Enter the interest rate as a decimal, divided by the number of periods per year. For example, if the annual interest rate is 6 percent and there are 12 monthly payments in a year, enter 0.5%.
4. Include the number of periods. This is the total number of payments over the life of the loan. For example, if there are 20 years of monthly payments, the number of periods would be 240 (20 x 12).
5. Enter the present value of the loan or investment. This is the amount you're borrowing or investing. For example, if you're taking out a $200,000 mortgage, the present value would be -200000 (note the negative sign).
6. Include the future value of the loan or investment. This is the amount you'll owe at the end of the loan term, and it's usually 0 (since the loan should be paid off by then).
7. Type a closing parenthesis and press Enter.

For example, suppose you're taking out a $200,000 mortgage with a fixed interest rate of 4 percent over 30 years. To calculate your monthly mortgage payment, you would use the PMT function with the following inputs:

=PMT(0.04/12,30*12,-200000)

The result will be the monthly payment you'll need to make to pay off the loan over 30 years.

Using the PMT function in real life

The PMT function can be extremely useful in a variety of financial modeling situations. For example, if you're purchasing a car and want to determine how much you'll have to pay each month, you can use the PMT function with the car's purchase price, the interest rate, and the number of payments. Similarly, if you're considering taking out a personal loan or a business loan, you can use the PMT function to estimate your monthly payments.

The PMT function can also be used to calculate investments. Suppose you're considering putting $10,000 into an investment account that earns 4 percent interest per year, and you want to know how much would be in the account after 5 years. The PMT function can be used to calculate the future value of the investment:

=FV(0.04/12,5*12,,,-10000)

The result will be the amount that will be in the investment account after 5 years.

Conclusion

The PMT function is a powerful tool in Excel that can help you calculate loan payments, mortgage payments, and other financial calculations. By understanding how the PMT function works and how to use it, you'll be able to make better decisions about loans, investments, and other financial matters.

So the next time you're faced with a mortgage or a loan, try using the PMT function in Excel to get a better idea of what you'll need to pay each period. It's a quick and easy way to stay on top of your finances and make informed decisions.