PPMT: Excel formulas explained

Hey, fellow Excel enthusiasts! Are you struggling to understand PPMT? Are you confused about the different formulas and what they do? Don't fret; I'm here to break it down for you and make it all simple.

What is PPMT?

PPMT stands for "Payment Principal Multiple Terms," and it makes it easier for you to calculate the principal payment for loans. Excel has a PPMT formula that does the calculation for you.

How does PPMT work?

PPMT, like other financial functions in Excel, is straightforward to use. The PPMT function calculates the principal payment made during a particular period of your loan payment schedule. In essence, PPMT splits the loan payment into interest and principal payments and returns the principal payment figure.

To use PPMT, you need to know and provide some critical information. These include:

• The interest rate for the loan.
• The number of payments for the loan's full term.
• The value of the loan.
• The payment you make per installment. This payment must be consistent each time, usually monthly.
• The period of the loan you are interested in calculating.

How to use the PPMT function

The PPMT formula syntax is:

Where:

• Rate represents the interest rate for the loan.
• Per denotes the period of the loan for which you want to calculate the principal payment. This period must be within the full term of the loan.
• Nper represents the total number of payments or installments for the loan's entire duration.
• Pv denotes the value of the loan.
• Fv (optional) represents the loan's ending balance. It must be zero if it gets omitted.
• Type (optional) represents the timing of the payment. 1 denotes payment made at the beginning of the month, while 0 indicates payment made at the period's ending. The default value is 0 if omitted.

Here's an example of how to use PPMT:

Assume you take out a loan of $100,000 with an interest rate of 5% and will repay it over 20 years with monthly installments. You want to know how much of your payment goes towards reducing the principal amount in the 5th year.

The result of this function will be the principal paid in the 5th year.

Common mistakes with PPMT

If you don't provide the correct details in PPMT, you won't get the correct results. Some common mistakes include:

• Entering the period of your loan incorrectly. Make sure the period is not greater than the loan term.
• Providing the wrong interest rate. Ensure the interest rate includes the correct percentage and is divided by the correct number of payments per year.
• Confirming the loan's value. Make sure the amount is in the correct column.

Conclusion

PPMT is a formula that makes calculating the principal payment for a loan easier. With the right inputs, you can calculate the principal payment for a specific period, and Excel does it all for you.

Understanding PPMT can help you make informed decisions when taking out loans and making repayments. You can monitor the principal payments made on a loan for any period, giving you a comprehensive view of the loan repayment schedule.

Now you have all the information you need to start using PPMT. If you got lost in the process or got stuck, don't hesitate to re-read this article, or google search keywords like "Excel PPMT function" to get all the information you need. Remember, practice makes perfect, so start using this fantastic function and become an Excel master in no time!