The RATE function allows you to calculate the interest rate of a loan based on known inputs like payment amount, loan term, and total loan value. In this lesson, you’ll learn how the function works and see how it’s used to evaluate financing options for HVAC customers, helping you understand how changes in rate, term, or payment impact affordability and total cost.
Download the Excel file used in this tutorial:
Start with the key loan details already available in the worksheet:
In the video, the loan term is already expressed in months, which makes the setup easier for the RATE function.
Enter the RATE function using the financing inputs:
This returns the periodic interest rate, not the full annual rate.
After pressing Enter, Excel returns a small percentage value.
To make the result easier to interpret for financing comparisons:
This gives you the annualized rate for each option in the table.
Once the annual rate is calculated:
This is especially useful when the rate is not clearly provided and you need to back into it from the loan terms.
In the video, the RATE function is paired with the PMT function to show how the financing pieces connect.
Using both functions together makes it easier to test financing scenarios from different angles.
After finding the rate, the next step is scenario testing.
The video shows how you can change variables such as:
This helps you evaluate questions like:
The value of RATE is not just finding a percentage. It is understanding how financing terms work together.
By combining RATE with PMT and other financial functions, you can explore:
This is what makes the function useful in real decision-making, not just calculation.
The video emphasizes that many financing offers already show the interest rate, but RATE is still useful because it lets you:
That makes it a practical tool for evaluating financing plans in Excel.
Unlike some other financial functions, RATE does not come from a simple manual equation in the worksheet.
Excel solves it iteratively behind the scenes, which is why the video does not show a standard formula breakdown.
The important takeaway is simply this:
Use PMT alongside it to test how payment changes when financing assumptions change
Q1. What does the RATE function do in Excel?
The RATE function calculates the interest rate of a loan or investment based on inputs like number of periods, payment amount, and present value. It helps you determine the true cost of financing.
Q2. Why is the RATE function important for financial analysis?
It allows you to evaluate whether a financing offer is competitive. Instead of just looking at monthly payments, you can calculate the actual interest rate and compare different loan options more accurately.
Q3. Why isn’t there a simple formula behind the RATE function?
The RATE function uses an iterative method (called the Newton-Raphson method) to solve complex financial equations. This means Excel calculates the rate behind the scenes without requiring you to manually apply a formula.
Q4. Why does the result sometimes look like a small percentage?
Excel typically returns the periodic rate (for example, monthly). To get the annual rate, you need to multiply the result by the number of periods in a year (usually 12).
Q5. How is the RATE function connected to other financial functions?
The RATE function works closely with functions like PMT (payment) and PV (present value). Together, they allow you to analyze loans from different angles and adjust variables like term, payment, or rate.
Q6. When should I use the RATE function in real scenarios?
Use it when you want to compare financing offers, validate lender terms, or understand how loan conditions affect monthly payments and total interest paid over time.