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 a customer has $50 of interest on their account, and makes a payment of $100, the first $50 of the payment will be applied to the interest outstanding on the loan, and the remaining $50 for the payment will be applied to lower the principal balance owed on the loan. 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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