Final answer:
To determine the principal paid in a payment, one must subtract the interest from the total payment. Over time, as the loan principal decreases, more of the payment is attributed to principal reduction. An amortization schedule can be used to break down the payments into interest and principal.
Step-by-step explanation:
To figure out how much principal is paid in a particular payment, you need to understand how payments are applied to your loan's balance. Payments are typically applied to interest first, with any remaining amount being applied to the principal. This is known as amortization. Over time, as the principal decreases, the amount of each payment that goes towards principal increases.
Let's consider an example with a simple two-year bond that was issued for $3,000 at an interest rate of 8%. In the first year, the bond pays $240 in interest (which is $3,000 x 8%). In the second year, the bond again pays $240 in interest, plus the return of the $3,000 principal.
For loans like a mortgage, where you have a fixed monthly payment, part of each payment covers the interest based on the current principal, and the remaining portion reduces the principal. Over time you pay less in interest and more towards the principal. The exact amount of principal paid off in each payment can be determined by a loan amortization schedule, which breaks down each payment into interest and principal portions.
In the case of credit card payments, the minimum payment might cover more than just the interest, but how much more depends on the creditor's policy and the current balance. Creditors use a formula every month to calculate your minimum payment that continues every month until you pay off the card.