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’sA 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’sInterest 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’sThis 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’sThat is a banking

term that represents the

amount of money borrowed from the

bankSo what is the

Principal Balance?

So you take the car price and subtract

the down payment?

Exactly!

Buying a Car – The ABC’sNow 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’sSo 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’sIt 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’sWe 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 $16,000.00

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 months 60

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’sThe spreadsheet

shows that the PMT calculation is a

monthly payment of -$288.55So if I pay that

amount monthly for 5 years, I end

up giving the bank $17,312.79

Then I paid $2,912.79 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 ReviewLet’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 ReviewThe 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 ReviewSince 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!