Principal
Quick Definition
The original loan amount borrowed, before interest is applied.
Full Explanation
The principal is the original amount of money borrowed in a loan or mortgage, excluding interest. For example, if you take out a $400,000 mortgage, the principal is $400,000. Over time, as you make payments, the outstanding principal decreases — this is called paying down the principal. Your monthly payment covers both interest (charged on the remaining principal) and a principal repayment. Making extra payments directly to the principal can significantly reduce total interest paid.
Related Terms
Amortization
The total length of time to pay off a loan through scheduled payments.
Interest Rate
The percentage charged on the principal loan balance per period.
Mortgage
A secured loan used to purchase real estate, with the property as collateral.
Loan Term
The length of time you agree to specific loan conditions before renewal.
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