The original amount of money borrowed before interest—the base amount of a loan.
Principal is the original amount you borrow, separate from the interest charged on that loan. If you take out a $50,000 equipment loan, the principal is $50,000. Your monthly payments go toward both principal (reducing what you owe) and interest (the cost of borrowing).
Understanding principal helps you know how much of your loan payments are actually reducing your debt versus paying financing costs.
Every loan payment typically includes two parts:
Early in most loans, a larger portion of your payment goes to interest. As you pay down the principal, more of each payment goes toward the remaining balance.
The principal determines your total debt obligation. Interest rates are charged as a percentage of the outstanding principal—so as you pay down principal, your interest charges decrease. Paying extra toward principal can significantly reduce total interest paid over the life of a loan.
