What does the PMT function calculate?

The PMT function in Excel is designed to calculate the payment amount for a loan based on three critical factors: the interest rate, the total number of payments (or periods), and the principal amount of the loan. This calculation assumes that the payments are made at consistent intervals and that the interest rate remains constant throughout the life of the loan.

By inputting the interest rate, the number of periods, and the principal (loan amount) into the function, users can determine how much they need to pay periodically—such as monthly—to pay off the loan completely by the end of the term. This function is particularly useful for budgeting and financial planning, as it allows borrowers to understand their payment obligations.

Understanding the PMT function's application is essential for effective financial decision-making, especially when dealing with loans that involve regular payment schedules.