# What is the formula for calculating 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 tota

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