Moneyzine
Contents
/Personal Finance/Principal (Finance)

Principal (Finance)

Moneyzine Editor
Author: 
Moneyzine Editor
1 mins
September 25th, 2023
Advertiser Disclosure

Definition

The term principal can have several meanings. It can refer to the remaining balance on a mortgage or loan, the owner of a privately owned company, or even the par value of a bond. When the term principal is used in this publication, it's often referencing the outstanding balance on a loan.

Explanation

When making a monthly mortgage or loan payment, a portion of the money is directed towards paying down the principal, in addition to the interest charges for use of the money. In the early stages of a mortgage, a larger proportion of the monthly payment is used to pay for interest charges. Over the life of the loan, a larger proportion is directed to reducing the outstanding principal.

Several of the loan calculators appearing on this website demonstrate this point.

Example

A 30 year loan of $100,000 at 6% interest rate would require a monthly payment of $599.55. In the first month, $500.00 of the payment is used to pay the interest expense, and $99.55 is used to pay down the principal.

In the 25th year of the loan, the monthly payment is still $599.55; however, with an outstanding principal balance of only $31,000 on the loan, $442.28 of the payment goes towards principal pay down, and only $157.27 is needed to pay the interest expense.

Related Terms

Related Content

  • What Can Help You Meet Your Budget While Shopping for Important Items?
    Budgeting while ensuring you don't compromise on quality can seem daunting. Whether filling your pantry, updating your wardrobe, or keeping up with the latest tech, smart shopping strategies are crucial for keeping your finances in check.
    April 2nd, 2024
  • How to Make a Million Dollars in 10 Years
    Truthfully, this title should actually be “How to Make a Million Dollars in 10 Years Without Going Into Debt", but that is just getting a little too winded for my liking. It’s true though!
    November 18th, 2024
  • How to Apply Maslow’s Hierarchy to Your Money This Year
    You might vaguely remember your psychology teacher talking about Maslow. He pointed at a picture of a triangle as you nodded off in the back of the school room.
    November 18th, 2024
  • How to Tackle Multiple Savings Goals
    When there’s only so much money to go around, there are often multiple savings goals competing for your money. Think of the young professional who’d like to get a more reliable car, buy a house, and save for retirement. Or consider the young family that’s saving for college, retirement, and a bigger house.
    March 22nd, 2024
  • The Countdown to Early Retirement: 10 Expenses to Eliminate
    Dreaming of waving goodbye to the daily grind five years ahead of schedule? The road to early retirement is paved with more than good intentions; it requires a meticulously crafted strategy with surprising twists. It's not solely about what you should be doing—like diligently saving a portion of your income or investing wisely—but also about what you need to stop doing.
    March 22nd, 2024

Contributors

Moneyzine Editor
The Moneyzine editorial team consists of writers and content specialists with diverse backgrounds.
Moneyzine 2024. All Rights Reserved.