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

Are You a Financial Disaster? The Real State of Your Finances
Have you ever heard the saying, “If you don’t have a goal, then you’ll wind up hitting it with amazing accuracy.”? In other words, if you have no idea where you want to be in your future life, then it really doesn’t matter what you do because wherever you end up will match your goal…which apparently was never important enough for you to think about in the first place.
March 13th, 2024
11 Steps to Transform Your Finances (For Good This Time!!)
The money comes in…the money goes out…and at the end of each month you have very little to show for all your efforts. Then, after buckling down for a bit and saving here and there, it feels like you’ve gained a little traction…until another unexpected bill comes along and takes your bank account down to nothing (or probably more likely, racks your credit card back up to the max instead of down to zero like you were fighting for). It’s time to change this. Now is the time to transform your finances.
March 11th, 2024
5 Kiyosaki Hacks to Make You Rich: Are You Missing Out?
Have you ever considered the way you think about money could be the key to building your wealth?
February 22nd, 2024
50/30/20 Budget Spreadsheet: How To Use the 50/30/20 Rule
Do you ever run out of money before the end of the month? Or stare in disbelief at your dwindling balance and wonder where it’s all gone?
February 26th, 2024
Joe Biden’s Net Worth in 2024: President’s Path to a Millionaire
Although estimates vary, Forbes most recently put the US president’s net worth at $10 million — less than one-quarter of the $41 million some Republican supporters claimed the president was worth. Biden’s net worth had gone up since he assumed office, but rather than a pay increase, Forbes’s analysts say it had to do with his real estate portfolio growing in value in recent years.
January 31st, 2024

Contributors

Moneyzine 2024. All Rights Reserved.