Loans There may be many times in your life in which you will need to borrow money: paying for college, buying a car, buying a home, improving a home, paying for a wedding, etc. When borrowing money, you are charged interest given as an annual percentage rate (APR). While the interest is given as an annual rate, you are usually asked to make fixed monthly payments on the loan over a predetermined period of time. We can use Excel to determine what the monthly payments will be, how much you will pay back total, and how much interest will be paid. For example: Borrow $10,000 at 6% APR to be paid back in 10 years. Use the fx icon near the formula bar in Excel. Under the category drop down menu, choose financial, then for function, choose PMT. A box will appear. Enter the Rate (interest rate for the time period) the APR (as a decimal) divided by 12. Enter the NPer (total number of payments) total number of months = number of years times 12 Enter Pv (present value) loan amount, enter as a negative number with no commas For above example: Rate = .06/12 Nper = 10*12 Pv = -10000 Monthly payment $111.02 To calculate the total amount paid back over the course of the loan, multiply the monthly payment by the total number of payments. 111.02*120 = $13,322.40 To calculate the amount of interest paid over the course of the loan, subtract the loan amount from the total amount paid. $13,322.40-$10000 = $3,322.40 Changing the interest rate and the time given to pay back the loan can have a drastic effect on the total amount paid back. For example, if the APR in the above example had been 8.5% instead of 6%, the monthly payment would be $102.84 and the total paid back would be $14,878.80 and the interest would be $4,878.80 which is $1,556.40 more than our original example. A lower interest rate will always save you money. If we paid back the loan in 20 years instead of 10 with an APR of 6%, the monthly payment would be $71.64 but the total paid back would be $17,193.60 and the total interest paid would be $7,193.60 which is almost $3871.20 more than the original amount. In this example the interest paid more than doubles. Increasing the length of the loan decreases the monthly payment but increases the total amount paid. Choose the shortest time period that you can afford. Also, if you pay more than the mandated monthly payment, you can shorten the time it will take to pay back the loan as well as decrease the total amount paid back. (Some banks will charge a penalty fee if the loan is paid back too quickly.) One benefit of home loans (mortgages and most home equity loans) is that the interest that you pay is tax deductible. If you must have debt, a loan with tax deductible income is better than other debt (ie. Credit card debt)