The term principal has a number of definitions and applications in the world of finance. With regard to borrowing and lending, the term principal amount refers to the original amount of money that was borrowed. For instance, if a person takes out a $100,000 mortgage, the principal amount is $100,000.
The principal amount can also refer to the remaining amount due on a loan. If a person has paid off $60,000 of that original $100,000 mortgage, the principal amount can then refer to the $40,000 of the original principal that remains to be paid. This can also be referred to as the remaining principal.
Paying the Principal Amount
When paying off a loan, installments of the interest on the principal amount are typically paid first. For example, if the annual interest rate on a loan of $1,000 is 5%, then the borrower will owe $50 in interest per year during the life of the loan, or 5% of the remaining principal. Each payment made will include a portion of that $50 plus a calculated portion of the principal amount. A borrower can pay an extra amount of principal in a payment, which will ultimately reduce the amount of interest paid on the smaller principal amount.
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