Principal
The original amount borrowed or invested, separate from any interest charged or earned on it.
What it means
Principal is the base amount on which interest is calculated. For a loan, it is the amount you borrowed, and later the portion still unpaid. For a deposit or bond, it is the amount you put in or the bond’s face value.
On most installment loans, each payment is split between interest and principal. Only the principal part reduces the balance. Early in a mortgage, most of the payment is interest; later, most goes to principal. Extra payments directed to principal shrink the balance faster and reduce total interest.
Example
Suppose you take a $20,000 car loan. The principal starts at $20,000. If your first payment is $400 and $100 of it is interest, the other $300 reduces principal to $19,700.
How it’s used
- Reading loan and mortgage statements
- Making extra payments to pay off debt sooner
- Tracking how much of an investment is original money versus growth
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.