# How to Calculate First Month's Principal Payment

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