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Debt

Principal

Also called: principal balance, loan principal

Principal is the amount you borrowed and have to pay back, separate from the interest a lender charges. On a loan with regular payments, part of each payment reduces principal and part covers interest.

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How it works

At the start of a loan, principal is the amount borrowed. Each payment is then divided between interest, the lender’s charge for lending, and principal, which lowers what you owe. The amount still owed is often called the principal balance. In saving and investing, the word usually means the original amount deposited or invested, before any interest or earnings.

Principal matters because interest is usually figured from it. On a simple-interest loan, each month’s interest is based on the balance actually owed, so as principal falls, the interest that follows falls too. The same logic explains why borrowing less at the outset, for example after a larger down payment, can reduce the interest paid over the life of a loan.

Extra payments are where the details matter. On a simple-interest loan, extra money applied to principal shrinks the balance that future interest is charged on. With precomputed interest, where the interest is calculated up front and added at the start, paying extra may not reduce the interest owed in the same way, so it can help to ask your lender which method applies and how extra payments are credited.

Try it with your own numbersLoan Payment CalculatorFree loan payment calculator for fixed-rate car, personal and consolidation loans. See the monthly payment, total interest and how the term changes both.

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Sources and further reading

Examples are illustrative and focus on U.S. personal finance. This page is educational, not individual financial, investment, tax, or legal advice. Read our editorial approach or report a correction.

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