210 – Payment Function

Buying a Car – The ABC’s So you want to buy a car! We must first look at all the variables! Car Price, Down Payment, Interest Rate, Principal balance Loan Term

I know what the car price is, but what is a down payment? In advertisements I hear them say things like “Great Deals with 0% Down”

Buying a Car – The ABC’s A down payment is the amount you are willing to pay up front! You must give the dealership $ before you drive home The rest of the car price you will ask the bank for a loan! In today’s economy you won’t find too many ads for 0% down payment. For our example today we are going to ask the car buyer for 10% of the Car Price for the down Payment

I sometimes hear on ads the word APR and then some numbers with a percent. Ok, now what is the Interest Rate

Buying a Car – The ABC’s Interest is the amount you are going to pay the bank for your loan. You borrow money and the bank wants it back plus interest. There are all kinds of loans, but we are going to look at a simple fixed rate loan. APR stands for Annual Percentage Rate. The interest rate We need to remember that APR is the annual rate

Buying a Car – The ABC’s This is important to remember because we will need to divide by 12 to get to a monthly rate Is that because we pay for a car on a monthly basis? Exactly!!

Buying a Car – The ABC’s That is a banking term that represents the amount of money borrowed from the bank So what is the Principal Balance? So you take the car price and subtract the down payment? Exactly!

Buying a Car – The ABC’s Now let’s move on to loan term – how long are we going to pay for this loan! I have heard that cars are so expensive that people borrow money for 4, 5, or 6 years! Do I pay for my car once a year or monthly! Monthly is typical!

Buying a Car – The ABC’s So you will take the number of years and multiply by 12 to get the loan term! You told us that we would use a new Excel Function called PMT – Payment Function Why? Yes and it is a bit different than sum, max, min, average

Buying a Car – The ABC’s It has many variables (arguments)! All the ones we have been talking about! What answer will it give us? So let’s buy a car! It will calculate the monthly payment so that at the end you will have paid back all the money borrowed plus interest

Buying a Car – The ABC’s We will set up an Excel Spreadsheet that looks like the following one! How much do you want to spend? I want to buy a car for $16,000 and pay it off in 5 years Ok, we will give you an APR of 7.5% One more thing about the PMT function – it returns a negative number!

210 - Payment Function - Buying a Car Scenarios 5 Years Car Price$16, Down Payment 10% of Car price$1,600.00=B6*10% Principal or Borrowed Amount$14,400.00=B6-B7 Interest Rate (APR)7.50% Loan Term in months60 Monthly Payment($288.55) =PMT(B9/12,B10,B8,0) Total Payment($17,312.79)=B12*B10 Total Interest($2,912.79)

Buying a Car – The ABC’s The spreadsheet shows that the PMT calculation is a monthly payment of -$ So if I pay that amount monthly for 5 years, I end up giving the bank $17, Then I paid $2, in interest to the bank Yes, so the cost of the loan is the difference between what you borrowed and what you paid them with your monthly payment Right Again

Let’s Review Before Test

Payment Function Review Let’s review the PMT function arguments You start with =pmt( =pmt(rate/12, nper What is nper? Rate is the first argument and it is the Interest rate / 12 That makes the APR rate a monthly figure. Nper is number of periods to pay – how many months

Payment Function Review The next argument is PV which stands for Present Value. We used principal or borrowed amount for Present value =pmt(rate/12, nper, pv, fv) What is fv? Yes, because this is the present value of the loan balance – it is the starting balance for the PMT function. FV stands for Future Value. After paying all those years you owe the bank 0 –zero..

Payment Function Review Since the future value is almost always zero, you don’t have to use it. You mean I could leave it as =pmt(rate/12,nper,pv) Do I have to memorize this for the Test? Yes and the final argument called type is also optional. That argument will be saved for business majors!! Absolutely!