| A lot of the time, we are given a couple variables | | | | instead of values: "=PMT(i,n,pv)". To calculate |
| and we want to calculate the payments on a loan. | | | | payments on your loan, just replace the i with |
| For example, you are trying to finance a $10,000 car | | | | interest, n with number of payments and pv with the |
| at a 12% interest rate for 5 years. All you want to | | | | total loan amount. |
| find out is how much your monthly payment is going | | | | Using excel to figure this out is by far the easiest |
| to be and whether or not you can afford that | | | | way. Just plug your variables in and hit enter and you |
| payment. Just a heads up - you will need a calculator | | | | are finished. If you are deathly afraid of excel, you |
| to figure out these payments. Since you are probably | | | | can use the old-fashioned formula. Take a look at it |
| on a computer right now, you can use the calculator | | | | and maybe you might want to give excel a shot first: |
| on your computer, or you can use excel. | | | | Monthly Payment = (pv) * (i/(1-(1+i)^(-n))) |
| Lets use the example above and try to calculate out | | | | Ok, let’s solve this using our example: |
| your monthly payment. First, let’s set some | | | | Monthly Payment = (10000) * (.01/(1-(1.01)^(-60))) |
| terms. PV (Present Value) of the loan is going to be | | | | Monthly Payment = (10000) * (.01/(1-0.55045)) |
| $10,000. Your interest rate per year is going to be | | | | Monthly Payment = (10000) * (.01/.44955) |
| .12. However, since we are trying to calculate out | | | | Monthly Payment = (10000) * (0.022244) |
| MONTHLY payments, we are going to want to turn | | | | Monthly Payment = $222.44 |
| this 12% per year into a monthly rate. This is as | | | | So we get the same answer of your monthly |
| simple as dividing .12 by 12 which gives you .01 or 1%. | | | | payment being $222.44. Piece of cake! |
| Finally, we are going to want to define our number | | | | What do we learn from this? You are buying a car |
| of payments, n. We know that it will be 5 years, but | | | | for $10k and you only have to make monthly |
| we need to convert that into months. Simple as | | | | payments of $222.44 for five years to pay the thing |
| multiplying 5 by 12 which gives you 60 months. | | | | off. Doesn't sound that unreasonable? Well if we add |
| Ok, so here are our variables: | | | | up all the monthly payments, we find that you ended |
| Total number of payments: n=60 | | | | up paying a total of $13,346 for a $10,000 car. And |
| Interest: i=0.01 | | | | what is your car worth now? $3,000? So by the time |
| Present Value: pv=10000 | | | | you pay the car off, you are out a total of over ten |
| The easiest way to calculate payments is to use a | | | | grand! |
| spreadsheet on your computer like excel. Open up | | | | What would have happened if the financing option |
| the program, select a cell and type in the following | | | | had not been available to you? You might have |
| exactly (without the quotes): "=PMT(0.01,60,10000)". | | | | bought something a little more economical, say a car |
| Hit enter. This will automatically calculate out your | | | | worth $2500. Even if your car is now worth $500 |
| monthly payment of "-$222.44". This is what your | | | | now, you are still only out two grand instead of being |
| monthly payment on your car loan should be, given | | | | out over ten grand! |
| those exact variables. I am sure that the loan you | | | | Keep this in mind next time you calculate payments |
| are trying to calculate payments on has different | | | | on your loan! |
| variables, so here is the equation using variables | | | | |