Excel: Calculate a Loan Payment

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Problem: I am considering buying a car. I want to calculate the loan payment.

  1. Set up the price, term, and interest rate..

    Strategy: To calculate your car loan payment, you can use the PMT function. Follow these steps:

    1. Enter price, term in months, and annual percentage rate in cells A1:B3. The PMT function has three required arguments: the interest rate, the number of payments in the loan, and the original loan amount.

      Gotcha: The interest rate must be entered as a percentage. If you are planning on monthly payments (which is normal), you have to divide the annual percentage rate by 12.

      Gotcha: In financial terms, the bank is loaning you $25,995-a positive amount coming to you. Thus, the payments that you make to the bank are really a negative amount-money leaving your wallet. For this reason, the result of the PMT function will be negative. However, you can precede the third argument of the PMT function with a minus sign in order to return a positive payment amount.

    2. Enter the formula =PMT(B3/12,B2,-B1) in cell B5.

  2. The PMT function calculates the monthly payment.