What Is the Principal of a Loan?

If you have ever taken out a loan, you may have heard of the term “loan principal”. Your loan principal is the original loan amount borrowed by a borrower. 

But what is the principal of a loan? How does it really work? In this guide, we will find out what the principal of a loan is so you can make informed decisions about your finances. Read on to learn more. 

What Is the Principal of a Loan?

The principal of a loan is the initial amount of money that is borrowed from a lender. When a borrower repays their loan, some part of it goes towards repaying the principal, whereas the remaining goes towards the interest costs accrued on the principal over time. 

The loan principal exists in all types of debt, whether it’s personal loans, mortgages, car loans, student loans, credit cards, or business loans. Therefore, it is important to know your exact loan principal and how it works, so you can determine how much you actually owe.

The interest rate you get on your loan is actually a percentage of your loan principal. The loan principal is one of the key factors in determining what interest rate you get. 

Loan Principal Example

Imagine you have taken out a personal loan of $1,000, your APR is 20%, and your loan term is 1 year. Your initial loan principal will be $1,000. By using a loan calculator, we have calculated the monthly loan payments to be $92.63.

Out of $92.63, the principal amount repaid would be $83.33 per month. Whereas the remaining $9.3 would be the interest cost accrued every month.

The monthly loan statement that you get from your lender displays how much you still owe towards your loan principal balance, in addition to interest and any applicable fees.

How Is the Loan Principal Repaid?

The monthly loan payments you make remain the same throughout the loan term if you have a fixed-rate loan. However, how much of it goes towards the principal balance and interest differs. 

Most loan repayment plans require interest first and then the principal. This is to ensure that the interest rate is determined according to the lower remaining amount. 

As you make your monthly payments, you will be paying more towards the principal and less towards the interest. So the lower your loan principal, the lower the interest rate you’ll get.

Some lenders also allow principal-only payments, which are extra payments made every month towards just the principal balance. However, you will need to set them up with your lender as they are paid after paying the minimum due. 

So make sure to inquire whether your lender allows principal-only payments. You will need to provide a notice before paying any extra money.

What Is the Principal In Investing?

The term “principal” in investments refers to the total sum of money that is invested in something. It can also refer to the actual value of the asset or the investment. For instance, if you have invested $100,000 in a business, the principal amount will be $100,000.

What Is the Principal In Business?

The term “principal” in business represents the key people involved in all the major dealings. It can also represent the business owner or the stakeholders.

Bottom Line

No matter what type of loan you are applying for, it is important to understand the meaning of all the key terms used in loans. The loan principal is a very important term used to represent the original amount of money borrowed. 

Now that you know what the principal of a loan is and how it works, you can manage your loans in an informed way. If you are looking for same-day personal loans in Utah, apply today at Cash in Minutes.