Loan Principal
Loan principal summary:
Loan principal is the money you still owe on a loan minus interest or fees you've agreed to pay.
As you make regular payments on a loan, the principal decreases.
By chipping away at the principal, you pay less interest.
Loan principal definition and meaning
The loan principal is the dollar amount you agreed to pay back and that you owe at this moment, separate from any interest or fees the lender charges. The loan principal goes down over time as you make payments.
For example, when you first borrow $10,000, the loan principal is $10,000. Say you make two years' worth of payments and your total balance comes down to $7,500. At that point, your loan principal is $7,500. Over time, as you make regular payments, your principal decreases until the loan is repaid.
Key concept: Loan principal is the amount you owe on a loan at a given moment, minus any associated interest or fees.
More about loan principal
Lenders make money by charging interest on the money you borrow. However, you only pay interest on your principal balance.
Have you ever noticed that the longer you make payments on a loan, the more the balance drops with each payment? That’s because as your principal balance decreases, the interest you pay on the loan also decreases. To get a better understanding of how this works, check out our explanation of loan amortization schedules.
One of the main reasons people decide to make extra payments toward a loan is to pay down the principal. The faster the principal is whittled away, the less a lender collects in interest.
Loan principal: a comprehensive breakdown
A loan has two parts: principal and interest. Loan principal is the amount you borrow, and loan interest is the amount you pay a lender for borrowing money.
Understanding the difference between principal and interest could help you reduce your total loan cost. For example, if you pay extra money toward your loan, you could reduce the total amount of interest that you’ll pay by the time it’s paid off. Even if you can pay just an extra $10 or $20 monthly, those extra dollars speed up the rate at which your principal is paid down. The faster your principal balance drops, the less the lender collects in interest.
Loan Principal FAQs
Is the principal the same as the balance?
Yes. The principal is the amount you still owe on the original amount you borrowed.
Why am I paying more interest than principal?
You’re paying more interest at the beginning of a loan because that’s when your principal balance is biggest.
You can search online for a loan amortization calculator and look at the monthly payment breakdown. That will show you how your payment is split between interest and principal as the balance gets smaller.
Is it better to pay interest or principal?
It's better to pay more toward your principal. You'll pay less interest by paying more toward the principal.
What would make the loan principal go up?
On some loans, it’s possible to get permission from your lender to take a break from making payments. If a loan accrues interest while your payments are paused, that interest will typically be added to the principal balance. Then, interest is charged on the new, higher amount. This is called interest capitalization. It’s one way your loan balance could increase.
If you have a HELOC, your loan balance could go up if you borrow more during your draw period. Similarly, although credit cards aren’t installment loans, new transactions could make your balance go up.
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