In this post, you will be guided through simple and easy-to-follow steps on how to use the IPMT function in Excel.
Microsoft Office Excel provides the IPMT function, which returns the interest portion based on a given loan payment and payment period. Using IPMT, we can calculate the interest amount of payment for the first period, last period, or any period in between. This is a built-in Excel function under the Finance category.
IPMT Function in Excel
The IPMT function returns the interest payment for a given time period for a particular investment based on the periodic and the constant payments along with the constant interest rate of that particular investment.
= IPMT(rate, per, nper, pv, [fv], [type])
The IPMT function and arguments
- Rate (Required) – The interest rate.
- Per (required) – The period for which we want to find the interest (Range is 1 to nper).
- Nper (Required) – The total number of payment periods.
- Pv (Required) – The present value.
- Fv (Optional) – The cash balance desired after the last payment is made. It defaults to 0.
- Type (Optional) – The timing of the payment.
Example for the IPMT function in Excel
Consider an example of an investment or loan amount of $50,000 where the interest is paid at a rate of 5% monthly with a total of 60 payments. Here the range of the period is considered as 1, while the future value and the type, that is the time for the loan is considered as 0.
How to use IPMT function in Excel?
- Open Microsoft excel and launch a workbook or create a new Excel sheet.
- As said in the description, you need the values of all the above arguments to carry out the IPMT function and get the correct and interest of the loan.
- Enter the arguments in the same order of the syntax, one below the other, as shown in the picture below.
- At this time, in a similar way enter the values of each of the arguments in their corresponding adjacent cells in the worksheet.
- Below the tabulated list of arguments, select a cell and enter “Interest amount”, the cell to the right will display the value of the formula (making identification easier).
- When entering the formula, always start with the “=” operator. After entering the “=” operator enter IPMT to initiate the formula followed by an open parenthesis. Excel recognizes “=’ as the start of a formula, if not included, excel will not accept and evade the execution of the function.
- With the parenthesis open, select the arguments in the order of syntax. The position of the cell will be visible in the formula. According to the order of the syntax, the value of the argument must be selected followed by a comma. The change in color of the cells aids to identify the name and of the cells in the formula.
- For the rate argument of the syntax, most of the interest rates are given annually. But since we are calculating for each month, that is 12 months in total, therefore the rate percent should be divided with 12.
- For the type argument, there are only 2 options to enter, that is 0 or 1. Enter 1 if the payment is made at the beginning of the period or enter 0 if the payment is paid at the end of the period.
- To conclude, close the parentheses and click enter. The cell which contains the formula will display the interest amount of the loan.
POINTS TO REMEMBER
- As the interest is quoted as an annual interest rate, for this loan we will make a payment every month, which is 12 payments in a year. So we have to convert the rate and the number of payments from annually to monthly depending on the data.
- For the interest rate, we should divide it by 12 to get the monthly interest rate. For the total number of payments, in the given example, it is 60, which is already quoted as monthly, that is 5*12 = 60.