Financial Dictionary -> Loans -> Principal

There are several definitions for the financial term Principal, or principal amount, although most of them refer to loans and mortgage amounts.

Firstly, principal can be used to refer to the amount of a loan or mortgage that is yet to be paid back, excluding any interest. For example if you have paid back $20,000 of a $60,000 loan, then the principal is $40,000 - because that much has yet to be paid back.

In a similar fashion it is also often used to simply refer to the original loan amount, before any repayment has taken place. E.g. "I've paid back half of my mortgage, but the principal amount was $150,000."

The third definition of principal, which refers to loans and mortgages, is that the principal amount is the percentage of a monthly payment that reduces the amount owed in a loan or mortgage, without interest. For example if your monthly repayment is $100 and the interest rate is $2, then the principal amount is $98 because the $2 covers the interest and not the original amount of the loan.

To put it into a mortgage context the principal amount is the original size of the mortgage and when any percentage of the principal amount is paid back, the principal amount will reduce in size. Simple calculations utile the principal amount when determining how much needs to be paid back or how long until the loan term is over.

When using the term principal the interest amount and any other costs are generally ignored.

In other business dealings the principal may also refer to the customer of whom an agent acts on behalf of (e.g. a seller of a house is the principal of an estate agent) and it is sometimes used to define a very important company executive.