210 – Payment Function
Buying a Car – The ABC’s
We must first look
at all the
variables!
So you want to buy
a car!
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
The rest of the car
price you will ask
the bank for a
loan!
For our example today
we are going to ask the
car buyer for 10% of
the Car Price for the
down Payment
A down payment is
the amount you are
willing to pay up
front! You must
give the dealership
$ before you drive
home
In today’s economy
you won’t find too
many ads for 0%
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.
APR stands for
Annual Percentage
Rate. The interest
rate
We need to
remember that
APR is the
annual rate
There are all kinds
of loans, but we are
going to look at a
simple fixed rate
loan.
This is important to
remember because
we will need to
divide by 12 to get
to a monthly rate
Buying a Car – The ABC’s
Is that because we
pay for a car on a
monthly basis?
Exactly!!
That is a banking
term that
represents the
amount of money
borrowed from the
bank
Buying a Car – The ABC’s
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!
So you will take the
number of years
and multiply by 12
to get the loan
term!
Buying a Car – The ABC’s
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
It has many
variables
(arguments)! All
the ones we have
been talking about!
Buying a Car – The ABC’s
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
We will set up an
Excel Spreadsheet
that looks like the
following one!
How much do you
want to spend?
Buying a Car – The ABC’s
I want to buy a car
for $16,000 and
pay it off in 5 years
One more thing
about the PMT
function – it
returns a
negative
number!
Ok, we will
give you an
APR of 7.5%
210 - Payment Function - Buying a Car
Scenarios
5 Years
Car Price
Down Payment 10%
of Car price
Principal or Borrowed
Amount
Interest Rate (APR)
Loan Term in months
$16,000.00
$1,600.00
$14,400.00
=B6*10%
=B6-B7
7.50%
60
=PMT(B9/12,B10,B8,0)
Monthly Payment
($288.55)
Total Payment
($17,312.79)
Total Interest
($2,912.79)
=B12*B10
The spreadsheet
shows that the PMT
calculation is a
monthly payment
of -$288.55
Buying a Car – The ABC’s
So if I pay that
amount monthly
for 5 years, I end
up giving the bank
$17,312.79
Right
Again
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
Let’s Review Before Test
Let’s review the
Payment Function Review
PMT function
arguments
You start with
=pmt(
Nper is
number of
periods to
pay – how
many
months
Rate is the first
argument and it
is the Interest
rate / 12
=pmt(rate/12, nper
What is nper?
That makes the
APR rate a
monthly figure.
The next argument
Payment Function Review
is PV which stands
We used principal
or borrowed
amount for
Present value
FV stands for
Future Value.
After paying
all those
years you
owe the bank
0 –zero..
=pmt(rate/12, nper, pv, fv)
What is fv?
for Present Value.
Yes, because this
is the present
value of the loan
balance – it is the
starting balance
for the PMT
function.
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)
Absolutely!
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!!