Finance · Glossary
What is Principal?
Quick definition
The original sum of money borrowed or invested, not including interest. The base on which interest is calculated.
Full explanation
Principal is the original amount of a loan or investment, separate from interest. In a $200,000 mortgage, the principal is $200,000; the interest is what the bank charges to lend it. With each mortgage payment, part goes to interest and part reduces the principal. Early in a loan, most of the payment is interest. Later, most reduces principal (this is amortization). "Paying down principal" means making payments that reduce the underlying balance — distinct from prepaying interest. For investments, principal is the amount you originally deposited. The return on principal is what creates wealth.
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Related terms
More from Finance
APR (Annual Percentage Rate)
The yearly cost of a loan, expressed as a percentage, including most fees. Used when borrowing money.
APY (Annual Percentage Yield)
The yearly return on a deposit or investment, including the effect of compounding. Used when saving money.
Compound Interest
Interest calculated on the initial principal AND on the accumulated interest from previous periods. The engine of long-term wealth.
Simple Interest
Interest calculated only on the original principal, not on accumulated interest. Used in short-term and consumer loans.
Amortization
Spreading loan payments over time so each payment covers both principal and interest, with the loan fully paid off at the end.
Equity
The current market value of an asset minus any outstanding debt against it. What you actually OWN of the asset.
Last reviewed: June 15, 2026 • Category: Finance