What Is the Principal?

What Is the Principal?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

The term “Principal” generally refers to a sum of money that was originally deposited or invested, excluding any interest or earnings. It is the initial amount of money needed to operate a business, investment, or a loan. This amount doesn’t include any profit made from the investment or the interest. When you take a loan, the principal is the amount lent to you which you generally repay with an addition of interest.

Related Questions

1. What is the difference between Principal and Interest?

Principal refers to the original sum of money borrowed in a loan or put into an investment, while interest is the cost of borrowing that principal. Interest is a percentage of the principal, charged by the lender to the borrower for the use of their money.

2. How does Principal relate to a Mortgage?

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In the context of a mortgage, the principal is the amount borrowed from the lender. Over time, a portion of every mortgage payment reduces the remaining principal, and another portion pays off the interest on the loan.

3. Can you repay the Principal amount at any time?

For some loans, you can pay down your principal at any time with no penalties. However, some lenders charge prepayment penalties if you pay off your loan early as this can alter their expected interest earnings.

4. How does a Principal payment work?

A principal payment is a payment toward the original amount of a loan that is owed. In other words, a principal payment is a payment made on a loan that reduces the remaining loan amount due, rather than applying to the payment of interest charged on the loan.

5. What is Principal in terms of investment?

In terms of investment, principal refers to the initial amount of money put into the investment before any growth or returns. For instance, if you are buying stock worth $500, the $500 is your principal. It represents the original capital, which can grow through interest or investment profits.