Principal
The original amount of money borrowed in a loan or invested in an account, excluding interest.
What You Need to Know
Principal is the base amount you borrow or invest—the starting point before interest kicks in. Understanding principal is crucial for loans, mortgages, and investments.
Loan Context: When you borrow $300,000 for a mortgage, that's your principal. Your monthly payment covers both principal (paying down the loan) and interest (cost of borrowing). Early in a loan, most of your payment goes to interest. Over time, more goes toward principal.
Example Mortgage Payment:
- Loan: $300,000 at 6% over 30 years
- Monthly payment: $1,799
- Month 1: $299 principal, $1,500 interest
- Month 360: $1,790 principal, $9 interest
Investment Context: If you invest $10,000, that's your principal. Any gains from interest, dividends, or appreciation are separate. Protecting your principal while earning returns is the goal.
Extra Principal Payments: Making extra principal payments on a mortgage or loan dramatically reduces total interest paid. Even an extra $100/month can save tens of thousands and shave years off the loan.
Key Insight: The faster you pay down principal, the less interest you pay overall—because interest is calculated on the remaining principal balance.
Sources & References
This information is sourced from authoritative government and academic institutions:
- consumerfinance.gov
https://www.consumerfinance.gov/ask-cfpb/
Related Calculators & Tools
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Related Terms in Debt & Credit
APR (Annual Percentage Rate)
The total yearly cost of borrowing money, including interest and fees, expressed as a percentage.
Amortization
The process of paying off a loan through regular payments that cover both principal and interest.
Annual Fee
Yearly charge for having a credit card—$0 to $550+. Premium cards charge fees but offer rewards that can exceed cost for high spenders.
BNPL (Buy Now, Pay Later)
A short-term financing option that lets you split purchases into installment payments (usually 4 payments over 6 weeks) with little or no interest—if you pay on time.
Balance Transfer
Moving credit card debt from one card to another, typically to take advantage of a lower interest rate or 0% promotional APR.
Balance Transfer Fee
One-time charge (3-5%) to transfer debt to 0% APR card. $5K balance = $150-250 fee. Must save more than fee to make transfer worthwhile.