You might come across a question on your exam asking about the amount of principal paid in the first month. For this calculation, you need to know the annual interest rate and total principal.
Here's How to Calculate the First Month's Reduction in Principal
When a payment is made on a loan, it's divided into two parts:
- Part of the payment is for that month's interest charge.
- The remainder goes toward paying down the principal.
To calculate the amount paid towards the interest in the first month, do the following:
First, convert your annual interest rate from a percentage into a decimal format by diving it by 100:
9 ÷ 100 = 0.09
Next, divide this number by 12 to calculate the monthly interest rate:
0.09 ÷ 12 = 0.0075
Now, multiple this number by the total principal. Remember that interest is *always* calculated on the principal, not the monthly payment:
$50,000 X 0.0075 = $375
So $375 of your first months payment will be interest.
Subtract this figure from your monthly payment to determine what amount of your payment is reducing your principal balance:
$403 - $375 = $28