# 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*