How to use RATE Function in Excel

The Excel RATE function is a financial function that returns the interest rate per period of an annuity. You can use RATE to calculate the periodic interest rate, then multiply as required to derive the annual interest rate. The RATE function calculates by iteration.

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

The RATE function syntax has the following arguments:

  • Nper    Required. The total number of payment periods in an annuity.
  • Pmt    Required. The payment made each period and cannot change over the life of the annuity. Typically, pmt includes principal and interest but no other fees or taxes. If pmt is omitted, you must include the fv argument.
  • Pv    Required. The present value — the total amount that a series of future payments is worth now.
  • Fv    Optional. 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 (the future value of a loan, for example, is 0). If fv is omitted, you must include the pmt argument.
  • Type    Optional. The number 0 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    Optional. Your guess for what the rate will be.
    • If you omit guess, it is assumed to be 10 percent.
    • If RATE does not converge, try different values for guess. RATE usually converges if guess is between 0 and 1.

Example: Let’s look at some Excel RATE function examples and explore how to use the RATE function as a worksheet function in Microsoft Excel:

In the following spreadsheet, the Excel Rate function is used to calculate the interest rate, with fixed payments of $50,000 per month, to pay off in full, a loan of $2,000,000 over a period of 5 years. The payments are to be made at the end of each month.

RATE Function - How to use RATE Function in Excel

Syntax:  =RATE(B1*12,B2,B3)

Result:

RATE Function in Excel 1 - How to use RATE Function in Excel

Here the result of the function is multiplied by 12, gives the annual percentage rate. B2 is a negative value because this is outgoing payment.

Based on the Excel spreadsheet above, the following RATE examples would return:

Syntax: =RATE(B1*12,B2,B3)
Result: 1.44%

Syntax: =RATE(B1*12,B2,B3)*12
Result: 17.27%

Note:

RATE is calculated by iteration. If the results of RATE do not converge within 20 iterations, RATE returns the #NUM! error value.

Notes:

You must be consistent with units for guess and nper. If you make monthly payments on a five-year loan at 10 percent annual interest, use 10%/12 for guess and 5*12 for nper. If you make annual payments on the same loan, use 10% for guess and 5 for nper.

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