Excel RATE Formula (Table of Contents)
RATE Formula in Excel
This RATE formula provides the interest rate of a period per annuity. RATE function repeatedly calculates to find the rate for that period. RATE function can be used to find an interest rate of a period and then can be multiplied to find the annual interest rate. So this formula can be used to derive the interest rate. The formula of this function is as follows.
=RATE(nper, pmt, pv, [fv], [type], [guess])
Below is the explanation of the given arguments:
- nper – No. of Payment periods for an annuity. (Required)
- pmt – Payment to be made for each period; this will be fixed. (Required)
- pv – Present Value, Total Amount that a series of future Payment worth now. (Required)
- fv – Future Value, Goal amount to have after the subsequent Instalment; if we exclude fv, we can take 0 instead. (Optional)
- type – This examines how the function will consider the payment due date, so we have to put this in binary 0 or 1; 0 means that payment due at period end. (Optional)
- guess – This argument is used for our guess of the interest rate. It will provide the rate function with a start before reaching 20 iterations. There were two possibilities for this argument when it excluded is assumes our guess as 10%; otherwise, it will attempt other values for input(Optional).
How to Use RATE formula in Excel?
We will now learn how to write the RATE formula to get the lookup value. Let’s understand this formula with some examples.
- For this example, suppose you want to buy a car, and the price of that car is INR 3,00,000.00. And you
went to a banker and asked for a car loan; you were said that you have to pay INR 10,000.00 per
month for 3 years (36 Months)
- Here is the situation where we can use our RATE function to find the Interest rate for the given
- Now, as per the below image, you can see that we have mentioned the details we have, Now initially
we will find the rate of interest per month and then for a year by multiplying it by 12.
Now you can see from the below image you can see that we have applied the formula for RATE is as
=RATE(B5, -B3, B2)
Here the arguments :
nper = B5 (Total no. Of Instalments)
pmt= -B3 (Payment for each Instalment)
pv= B2 (Loan Amount)
- Here you can notice that the pmt (B3) is taken negative because the calculation is from the borrower’s
perspective, so this is the monthly installment amount which is the cash outflow for the individual
(Borrower) must to pay every month. So the borrower is losing this amount every month; that’s the
cause why it’s negative.
- Now here if we calculate this loan from the bank’s perspective, as the bank is giving this loan on a monthly basis to the borrower, the (B2) loan amount will be in negative because on every Instalment the bank has to pay that less to the borrower monthly, so as per the perspective we have to change the negative sign in the formula.
- Now you can see that by using this function, we have found the rate of interest monthly (In our case, it’s 1.02%).
- And by multiplying it by 12, we can have the rate of interest annually (In our case, it’s 12.25%).
- Similar to the above example for the practice, we are going to see another example where we have to find the interest rate. As per the below image is the data we have to find the interest rate.
- Here we have 20 Lacs to pay with 50 thousand per month for 5 years (60 Instalments).
- So the arguments are as follows:
nper = 20 Lacs
pmt = 50,000
pv = 60 Instalments (5 years)
- As per the above image, we can see that the RATE function has been applied and found the monthly rate of interest is 1.44%
- Now by multiplying it by 12, we will get the annual rate of interest which is 27% for the given an example.
- For this example, suppose we know the rate of interest and nos of installment, but we want to find out the amount of the monthly installment.
- Here for this example, we have taken the following data as per the below image:
- We have taken a loan of 3 Lacs at 15% of interest rate (Annually), here we know the interest rate, but we need to find the pmt: Amount Payable for each Instalment.
- Here as we can see from the image below, the formula for pmt is as follows :
=pmt(B4/12, B3, -B2)
- We can notice a thing here that we have taken the B4/12 because the rate of interest provided to us is per annum (annually), so by dividing it with 12, we are making it monthly.
- So as we can see in the below image, the monthly installment amount will be $14,545.99, to be exact.
- Here as per the above example, we have found one of our argument for the RATE function.
Things to Remember about RATE Formula
This error can occur when the result of the rate does not converge within 0.0000001 for 20 iterations. It can happen when we don’t mention cash flow convection by assigning the negative sign to the appropriate argument in the formula; as per the above example, we have seen that when we calculate the rate for the borrower side, the monthly installment amount getting negative sign because of monthly cash outflow for the borrower. So if we didn’t apply that negative sign to the monthly cash outflow, we would encounter this error.
- So here we can put guess argument to work because it will allow us to start as it has to converge within 20 iterations and provide us with the closer or even the correct answer.
- All arguments should be numeric; otherwise, it will encounter the #value error.
- With the RATE function, when you’re calculating the interest rate for the given data, we will find the rates of interest per month. So to convert it to annual interest, we have to multiply it by 12.
This has been a guide to the RATE Formula in Excel. Here we discussed using the RATE Formula in Excel and practical examples, and a downloadable excel template. You can also go through our other suggested articles –