Principal
The original sum borrowed or invested, separate from any interest charged or earned on it.
What Principal means
Principal is the base amount. On a loan it is what you borrowed and still owe; on an investment it is what you originally put in.
Every loan payment splits between interest and principal. Only the principal portion reduces your balance, which is why early mortgage payments feel unproductive — most of the money is servicing interest on a balance that has barely moved.
Extra payments directed specifically at principal are unusually powerful. They shrink the balance that all future interest is calculated against, so a modest additional payment early in a mortgage can remove years from the term and tens of thousands in interest.
If you make extra payments, confirm with your servicer that they are applied to principal rather than held as a prepayment of the next scheduled installment.
Related terms
Amortization
The process of paying off a loan through fixed regular payments, where each payment covers interest first and the rest reduces the balance.
Interest Rate
The percentage charged for borrowing money or paid for depositing it, quoted as an annual figure.
Capitalization
When unpaid interest is added to your loan balance, so you begin paying interest on that interest.
APR (Annual Percentage Rate)
The yearly cost of borrowing, expressed as a percentage that includes the interest rate plus most lender fees.
Escrow
Money held by a neutral third party — either during a home purchase, or by your lender to pay property taxes and insurance.
Run the numbers
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