← Back to Glossary
Principal
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.