Principal
The original sum of money borrowed in a loan or invested, before interest or returns.
What is Principal?
Principal refers to the original amount of money borrowed in a loan or placed in an investment, excluding any interest, earnings, or losses. In a loan context, the principal is the base amount on which interest is calculated and which must be repaid in full. In investing, principal refers to the initial capital invested, distinct from any gains. As a borrower makes monthly payments, a portion reduces the principal (amortization) and a portion pays interest — early payments are typically weighted heavily toward interest, with the principal share growing over time.
Example
On a 30-year fixed mortgage of $400,000 at 7% interest, the monthly payment is approximately $2,661. In the first month, only about $328 of that payment reduces the principal — the remaining $2,333 goes to interest. By year 15, the principal reduction per payment has grown to roughly $700 as the outstanding balance decreases.