What Is Principal in a Loan?

Principal vs. Interest

Interest is the cost of borrowing; principal is the money itself. On most installment loans, early payments are mostly interest and later payments are mostly principal, a pattern shown in an amortization schedule.

Paying Down Principal

Any extra amount paid toward principal reduces the balance on which future interest is calculated. That is why extra principal payments shorten a loan and lower total interest, assuming the lender applies them to principal and there is no prepayment penalty.

Example

On a 200,000 mortgage, 200,000 is the starting principal. After several years of payments, the remaining principal might be 170,000, even though far more than 30,000 has been paid in total, because part of each payment covered interest.