Principal

Definition

Principal is the original amount of money in a loan or investment, before interest is added.

How principal works for loans

On a loan, principal is what you borrowed from the lender. Each payment usually has two parts:

• Interest (the cost of borrowing)
• Principal (the part that reduces your balance)

As principal gets smaller, the interest charged each month usually gets smaller too.

How principal works for investing

For savings and investing, principal is your starting amount. Returns are earned on principal — and with compounding, on prior returns too.

Simple example

If you borrow $10,000, your principal starts at $10,000. After paying back $1,500 of principal, your remaining principal balance is $8,500.

Why it matters

Understanding principal helps you read loan statements, compare payoff strategies, and estimate total borrowing costs more accurately.