Fixed Payment Loan Formula in Excel

A fixed payment loan, also known as an amortizing loan, is structured so that the borrower makes equal payments throughout the life of the loan. These payments cover both interest and principal, and as the loan progresses, the portion of the payment going towards the principal increases while the interest portion decreases. Understanding and calculating these payments accurately is crucial for both lenders and borrowers. This article will delve into the formula used to calculate fixed payments on a loan, demonstrate how to apply it in Excel, and offer tips for effective financial planning.

1. The Fixed Payment Loan Formula

The formula to calculate the fixed payment (PMT) on a loan is derived from the annuity formula:

$\text{PMT}=\frac{P\times r\times (1+r{)}^n}{(1+r{)}^n-1}$PMT=(1+r)n−1P×r×(1+r)n​

where:

• PMT is the fixed payment amount,
• P is the principal loan amount,
• r is the monthly interest rate (annual interest rate divided by 12),
• n is the total number of payments (loan term in months).

2. Applying the Formula in Excel

To calculate the fixed payment in Excel, you can use the built-in PMT function. The syntax for the PMT function is:

$\text{PMT}(rate,nper,pv,[fv],[type\left]\right)$PMT(rate,nper,pv,[fv],[type])

where:

• rate is the interest rate per period,
• nper is the number of periods,
• pv is the present value (the principal amount),
• fv (optional) is the future value, usually 0,
• type (optional) specifies when payments are due (0 for end of period, 1 for beginning).

Steps to Calculate Fixed Payments in Excel:

1. Set Up Your Spreadsheet

   • In cell A1, input the principal amount (e.g., 100000 for $100,000).
   • In cell A2, input the annual interest rate (e.g., 5% for 5%).
   • In cell A3, input the loan term in years (e.g., 30 for a 30-year loan).

2. Convert Annual Interest Rate to Monthly

   • In cell B1, calculate the monthly interest rate by dividing the annual interest rate by 12: =A2/12.

3. Calculate Total Number of Payments

   • In cell B2, calculate the total number of payments by multiplying the loan term in years by 12: =A3*12.

4. Use the PMT Function

   • In cell B3, use the PMT function to calculate the fixed payment: =PMT(B1, B2, -A1).

   The PMT function returns a negative value, representing an outgoing payment. You may want to format the cell to display it as a positive amount.

3. Example Calculation

Let's assume you have a loan of $200,000 at an annual interest rate of 4% for 30 years.

• Principal (P): $200,000
• Annual Interest Rate: 4%
• Loan Term: 30 years

Steps in Excel:

1. Enter 200000 in cell A1.
2. Enter 4% in cell A2.
3. Enter 30 in cell A3.
4. In cell B1, enter =A2/12 to get the monthly interest rate (0.3333%).
5. In cell B2, enter =A3*12 to get the total number of payments (360).
6. In cell B3, enter =PMT(B1, B2, -A1) to get the monthly payment.

4. Detailed Breakdown

To understand the impact of each payment, you can create an amortization schedule in Excel, showing the breakdown of each payment into interest and principal components.

1. Set Up the Amortization Table

   • Column A: Payment Number (1, 2, 3, etc.)
   • Column B: Payment Amount (constant, as calculated by PMT)
   • Column C: Interest Portion (remaining principal * monthly interest rate)
   • Column D: Principal Portion (payment amount - interest portion)
   • Column E: Remaining Balance (previous balance - principal portion)

2. Enter Initial Values

   • Start with the principal amount in the remaining balance column.

3. Calculate Each Row

   • For each payment period, calculate the interest portion, principal portion, and update the remaining balance.

5. Practical Tips for Using Fixed Payment Loans

• Budgeting: Ensure that your fixed payment fits comfortably within your budget. Use Excel to model different scenarios and payment amounts.
• Extra Payments: Consider making extra payments to reduce the total interest paid and shorten the loan term.
• Refinancing: If interest rates drop, you might benefit from refinancing to get a lower fixed payment.

6. Conclusion

Understanding and applying the fixed payment loan formula in Excel can greatly enhance your financial management skills. By accurately calculating and tracking your payments, you can make informed decisions about budgeting, refinancing, and managing your loan effectively. Excel's built-in functions and tools make it easy to perform these calculations and visualize your payment schedule.