Principal
Quick Answer
Principal is the original sum of money borrowed in a loan or invested, excluding any interest or earnings.
Definition
Principal is the original sum of money borrowed in a loan or invested, excluding any interest or earnings.
Explanation
In lending, principal is the amount you borrow. As you make payments on an amortizing loan, each payment reduces the principal balance. The principal decreases over time while equity increases.
In investing, principal refers to the initial amount invested. Returns are calculated based on this principal. Making extra principal payments can significantly reduce total interest costs.
Example
On a $250,000 mortgage at 6% for 30 years, the first month's payment sends $1,250 to interest and only $249 to principal.
Frequently Asked Questions
What is Principal?
Principal is the original sum of money borrowed in a loan or invested, excluding any interest or earnings.
How does Principal work?
In lending, principal is the amount you borrow. As you make payments on an amortizing loan, each payment reduces the principal balance. The principal decreases over time while equity increases.In investing, principal refers to the initial amount invested. Returns are calculated based on this principal. Making extra principal payments can significantly reduce total interest costs.
Can you give an example of Principal?
On a $250,000 mortgage at 6% for 30 years, the first month's payment sends $1,250 to interest and only $249 to principal.
Free Excel Templates
Also try our free Mortgage Amortization Schedule template
Create a detailed mortgage amortization schedule. See exactly how much principal and interest you pay each month over the loan term.
Download Mortgage Amortization Schedule