Calculate Interest Rate for Loan

The interest rate is the fee charged by a lender to a borrower and is expressed as a percentage of the principal—the lent amount. The interest rate on a loan is often expressed as an annual percentage rate, abbreviated as APR (APR).

Additionally, an interest rate may be applied to funds earned in a bank or credit union via a savings account or certificate of deposit (CD). The annual percentage yield (APY) on these bank accounts refers to the interest generated. In this post we will check how to calculate interest rate for loan.

Calculate interest rate for loan1

Borrower’s Debt Cost

While interest rates indicate the lender’s interest revenue, they represent the borrower’s cost of debt. Businesses compare the cost of borrowing versus the cost of equity, such as dividend payments, to identify the least costly source of financing. Given that the majority of businesses raise capital via debt or equity financing, the cost of capital is examined in order to establish the best capital structure.

APR vs. APY

Consumer loan interest rates are often expressed as an annual percentage rate (APR). This is the rate of return on investment that lenders need in exchange for the capacity to borrow money. For instance, the annual percentage rate (APR) on credit cards is mentioned. In the example above, 4% represents the annual percentage rate on the mortgage or borrower. The annual percentage rate does not take compounded interest into account.

The annual percentage yield (APY) is the interest rate received on a savings account or certificate of deposit (CD) at a bank or credit union. This interest rate is compounded.

What is the purpose of the RATE function?

The RATE function is a financial function for interest rate excel that is used to determine the interest rate paid on a loan or the rate of return required to achieve a certain return on an investment over a particular time period.

The RATE function is important for financial analysts since it can be used to determine the interest rate on zero coupon bonds.

=RATE(nper, pmt, pv, [fv], [type], [guess])

The RATE function uses the following arguments:

  • Nper (required argument) – The total number of periods (months, quarters, years, etc.) over which the loan or investment is to be paid.
  • Pmt (required argument) – This is the period-by-period payment. This figure must remain constant during the term of the loan. Principal and interest are included in the monthly payment, but no extra fees or taxes are included. If pmt is not specified, fv must be specified.
  • PV (required argument) – The present value of all future payments; the present value of all future payments.
  • FV (optional argument) – This is the investment’s target future value. This is the value we want to achieve when the final payment is paid. If we omit fv, it is considered to be zero (the future value of a loan, for example), and a pmt argument must be included in its place.
  • Type (optional argument) – Specifies how the formula will handle payment due dates. If no kind is specified or a value of 0 is used, payments are due at the end of the month. If 1 is entered, payments are due at the start of the period.
  • Estimation (optional argument) – Our best guess for the appropriate interest rate. This establishes a starting point for the RATE function, allowing it to converge on an answer more quickly than 20 iterations.

Related Functions

  • Excel RATE function
    The Excel RATE function returns the interest rate per payment period of an annuity.The syntax of the RATE function is as below:=RATE(nper, pmt,pv,[fv],[type],[guess])….

Excel RATE Function

This post will guide you how to use Excel RATE function with syntax and examples in Microsoft excel.

Description

The Excel RATE function returns the interest rate per payment period of an annuity.

The RATE function is a build-in function in Microsoft Excel and it is categorized as a Financial Function.

The RATE function is available in Excel 2016, Excel 2013, Excel 2010, Excel 2007, Excel 2011 for Mac.

Syntax

The syntax of the RATE function is as below:

=RATE(nper, pmt,pv,[fv],[type],[guess])

Where the RATE function arguments are:

  • nPer -This is a required argument. The total number of payments periods in an annuity.
  • Pmt – This is a required argument. The amount of the payment made each period.
  • Pv – This is a required argument. The present value of the payments.
  • Fv – This is an optional argument. The future value or a cash balance you want to attain after the last payment is made. If fv is omitted, it is assumed to be 0 (zero), that is, the future value of a loan is 0.
  • Type – This is an optional argument. The number 0 (zero) or 1 and indicates when payments are due.
Set type equal to If payments are due
0 or omitted At the end of the period
1 At the beginning of the period
  • Guess – This is an optional argument. An initial guess at the internal rate of return. if it is omitted, and it will be set as 0.1 or 10%.

Note:

  • Make sure that you are consistent about the units you use for specifying rate and nper. If you make monthly payments on a four-year loan at an annual interest rate of 12 percent, use 12%/12 for rate and 4*12 for nper. If you make annual payments on the same loan, use 12 percent for rate and 4 for nper.

Excel RATE Function Examples

The below examples will show you how to use Excel RATE Function to calculate the interest rate per period of an annuity.

#1 to get the monthly rate of the loan, using the following formula:

=RATE(B1*12,B2,B3)

Excel Rate examples1


Related Functions

  • Excel FV Function
    The Excel FV function used to calculate the future value of an investment based on a constant interest rate. The syntax of the FV function is as below:=FV(rate,nper,pmt,[pv],[type])…
  • Excel IPMT Function
    The Excel IPMT function used to calculate the interest payment for an investment based on a constant payment schedule and a constant interest rage.The syntax of the IPMT function is as below:= IPMT (rate, per, nper, pv, [fv], [type])…
  • Excel IRR Function
    The Excel IRR function returns the internal rate of return for a series of cash flows and the cash flows must be occurred at regular intervals (monthly or annually).The syntax of the IRR function is as below:=IRR(values, [guess])…
  • Excel ISPMT Function
    The Excel ISPMT function used to calculate the interest paid during a specific period of an investment.The syntax of the ISPMT function is as below:= ISPMT (rate, per, nper, pv)…
  • Excel MIRR Function
    The Excel MIRR function returns the modified internal rate of return for a series of cash flows and the cash flows must be occurred at regular intervals (monthly or annually). The syntax of the MIRR function is as below:=MIRR(values, finance_rate,reinvest_rate)…
    Excel NPER Function
    The Excel NPER function returns the number of periods for an investment or loan based on periodic payment amount and a constant interest rate.The syntax of the NPER function is as below:= NPER (rate, pmt, pv, [fv], [type])…
  • Excel NPV Function
    The Excel NPV function returns the net present value of an investment by using a discount rate and a series of future cash flows (future payments and income).The syntax of the NPV function is as below:= NPV (rate, Value1,[value2],…)…
  • Excel PMT Function
    The Excel PMT function returns the payment amount for a loan or investment based on constant payments and a constant interest rate.The syntax of the PMT function is as below:= PMT(rate, nper, pv,[fv],[type])…
  • Excel PPMT Function
    The Excel PPMT function returns the payment amount on the principal for a given period for a loan or investment based on constant payments and a constant interest rate. The syntax of the PPMT function is as below:=PPMT(rate, per,nper, pv,[fv],[type])…
  • Excel PV Function
    The Excel PV function returns the present value of a loan or investment based on constant payments and a constant interest rate. So you can use the PV function to get the present value based on a series of future payments.The syntax of the PV function is as below:= PV(rate,nper,pmt,[fv],[type])…

How to Calculate Compound or Average Annual Growth Rate

This post will guide you how to calculate the compound annual growth rate (CAGR) in excel. How to calculate the average annual growth rate (AAGR) using excel formula.

What is Compound Annual Growth Rate (CAGR) and AAGR?

CAGR measures the rate of return for an investment over an investment period. It is also called a “smoothed” rate of return because it measures the growth of an investment have grown on an annual basis.

The average annual growth rate (AAGR) is the arithmetic mean of a series of annual growth rates.

Calculate Compound Annual Growth Rate

To calculate compound annual growth rate, you need to divide the ending value of the investment by the value at the start of the period, then raise the result to the power of one divided by the number of years, and then subtract one form the subsequent result.

If you want to calculate compound annual growth rate, you can try to use the below generic CAGR formula:

=(EV/BV)^(1/n)-1

BV – start value of the investment

EV – End value of the investment

N – Number of years

Assuming that you have the start value in Cell B1, the ending value of the investment in cell B2, the number of periods in B3. Then we can write down the following formula to calculate CAGR:

=(B2/B1)^(1/B3)-1

1# enter the above formula into cell C2

compound annual growth rate1

2# select the cell you entered the formula (Cell C2), then Go to HOME Tab, click “Percent Style” command under Number group to convert the number to percentage format.

compound annual growth rate2

You can also calculate compound annual growth rate using the POWER function to create the following generic excel formula:

=POWER(EV/BV,1/n)-1

For above example, you can use this generic formula to write down the following formula:

=POWER(B2/B1,1/B3)-1

compound annual growth rate3

There is another method for calculating CAGR in excel, you can use the RATE function to create the following generic formula:

=RATE(n,,-BV,EV)

N is the number of years

Bv is the beginning value of the investment

EV is the ending value of the investment

So you can enter the below formula in the Cell C2 to calculate CAGR:

=RATE(B3,,-B1,B2)

compound annual growth rate4

Calculate  Average Annual Growth Rate (AAGR)

You can use the below generic formula to calculate the average annual growth rate in excel.

AAGR=(Growth rate A + Growth rate B +…)/number of years

Assuming that you have a list of revenues for a 5-year period, you need to get the growth rate of each year firstly, such as, calculating the growth rate from 2013-2014 is (B3-B2)/B2=20%. So the generic formula of growth rate is as follows:

Growth rate = (Ending value – Beginning Value)/ Beginning value

And then you need to average those annual growth rates to get the AAGR value.

Let’s refer to the following steps to calculate CAAG:

1# enter the above formula of growth rate into the cell C3 to the growth rate in 2014, then press Enter key. Then drag the AutoFill Handle down to other cells.

=(B3-B2)/B2

average annual growth rate1

2# select the range C3:C6, then go to Home Tab, click “Percent Style” command under Number group

average annual growth rate2

3# you will see that you have the 4 annual growth rates for a 5-year period in C3:C6.

average annual growth rate3

 4# next you need to use the AVERAGE function to average all annual growth rates to get the AAGR. So enter the below formula in Cell C7.

=AVERAGE(C3:C6)

average annual growth rate4


Related Functions

  • Excel AVERAGE function
    The Excel AVERAGE function returns the average of the numbers that you provided.The syntax of the AVERAGE function is as below:=AVERAGE (number1,[number2],…)….
  • Excel RATE function
    The Excel RATE function returns the interest rate per payment period of an annuity.The syntax of the RATE function is as below:=RATE(nper, pmt,pv,[fv],[type],[guess])….