Question

What is the use of the PMT function?

Answer 1

• Calculates Loan EMIs: The primary use of the PMT function is to calculate the fixed periodic payment (Equal Monthly Instalment or EMI) required to clear a loan over a specific period.
• Based on Constant Variables: It works out the exact payment amount assuming that the loan interest rate and the payment schedule remain completely constant throughout the loan tenure.
• Splits Principal and Interest: While the PMT function provides one single total payment figure, it helps accountants budget for payments that cover both the interest charges and the principal loan balance.
• Aids Financial Planning: In business management, it is highly useful for comparing different bank loan options, checking affordability before buying heavy machinery, and planning future cash outflows.
• Syntax Reference: The formula uses the structure = PMT(rate, nper, pv), where it takes the interest rate per period (rate), total number of payments (nper), and the total loan amount borrowed (pv).