Principal
Definition
The original amount of money borrowed or invested. If you take a $200,000 mortgage, $200,000 is the principal. Interest is what lenders charge to let you borrow it. As you pay down a loan, principal decreases; interest charges decrease with it.
Why It Matters
Principal and interest are different. Paying extra principal directly reduces the total interest you'll pay. A $1,000 extra principal payment in year 1 of a 30-year mortgage might save $2,000+ in interest over the life of the loan.
Example
Borrow $100,000 at 5% APR. Month 1 interest: $100,000 × 5% ÷ 12 = $417. After you pay down principal to $90,000, month 2 interest is only $375. Less principal = less interest each month.
Related Tools
Related Terms
Pulsafi definitions are sourced from primary regulatory and industry references. See our methodology and data sources.