Explaining PMT in finance and how businesses can use it
PMT is an important function in finance, especially when it comes to calculating the payments for loans. No matter what type of business you work within, you might hear the acronym PMT used in the office. But what does PMT stand for in finance, where would you use it and how can you calculate it?
In this article, we’ll be explaining everything you need to know about PMT in finance, from what PMT stands for, to how you can use the automatic PMT function in Microsoft Excel.
What is PMT?
PMT is an abbreviation of the word ‘payment’. In finance, PMT is a function which is used to calculate payments which are due at specific frequencies, for example loans or mortgages. In order to use the PMT function, the interest rate will need to be constant, and the payments will need to be level.
The PMT function is often used by businesses to calculate their monthly repayments on a business loan, or to calculate payments due to the business from customer finance deals.
When is the PMT function used?
If you need to calculate the future payments of a loan, you will probably be using the PMT function. However, this assumes that the interest rate and payments are constant over time.
For example, if you are taking out a business loan of £25,000 to be paid over 3 years at an annual interest rate of 4%, you could use the PMT function to discover what your monthly payments would be. This would allow you to calculate that the monthly repayments for your business loan would be £737.30 per month, with a total repayment figure of £26,542.97.
Some of the purposes for which the PMT function can be used include:
Calculate mortgage repayments
Calculate annuity payments
Calculate loan repayments
How to use the PMT function in Excel
Microsoft Excel incorporates a PMT function to automatically calculate loan repayments. This allows users to quickly and easily calculate repayment sums, without needing to perform any complex manual calculations.
Before we take a look at the format of the PMT calculation performed by Excel, there’s a few variables that we need to understand: rate, nper and pv.
‘Rate’ is the interest rate of the loan, which is typically given as an annual percentage rate, or APR. If you are making payments on an annual basis, you can simply type in the APR here. However, if the payments are being made on a monthly basis, you’ll need to divide the APR by 12 to find the monthly rate.
‘Nper’ is an abbreviation for the number of periods – that is the number of repayments that will be made during the term of the loan. For example, if you will be paying for a loan monthly over 5 years, the number of repayment periods will be 60, so you would enter 60 as the nper.
‘PV’ stands for present value. This is the current value of the loan today. You might also hear present value referred to as the principal.
Now that we understand the variables used within Excel’s PMT calculation, let’s move on to looking at the format of the formula.
The format used by Excel to input data for the PMT calculation is:
This is the formula that you will need to type into the formula bar of Excel to calculate PMT. You will need to carefully input the variables that we described above, ensuring that you make the relevant adjustments depending on whether payments are being made annually or monthly.