Principal is the amount of money actually borrowed, before any interest or fees. As payments are made, the portion applied to principal reduces the remaining balance.
Principal is the original sum you receive and are obligated to repay, separate from the interest and fees that make up the cost of borrowing. On an installment loan, interest is calculated on the outstanding principal, so as the principal balance falls over the life of the loan, the interest portion of each payment generally decreases and the principal portion increases. Paying more than the scheduled amount, when a loan permits it, applies the extra toward principal and reduces the balance faster, which can lower the total interest paid. The principal is also called the loan amount or the balance owed.
Principal is the starting point for most loan math. Interest is usually calculated as a rate applied to the principal still owed, and each scheduled payment on an amortizing loan is split between interest and principal. Early in the schedule more of each payment goes to interest; later, more of it goes to principal.
Charges added to the loan can increase the balance that interest is charged on, which is why loan disclosures separate the amount financed from the finance charge. Reading those two figures side by side shows how much of the repayment is the money actually received and how much is the cost of borrowing it.
In a loan disclosure, principal usually appears as the amount financed, which may be smaller than the loan amount if charges are deducted up front. Keeping the two apart matters when comparing offers: two loans with the same stated amount can put different sums in the borrower's hands, and interest is generally calculated on the balance owed rather than on what was received.
An example
A borrower takes out an installment loan and later looks at the payment history. The first payment shows a larger share applied to interest and a smaller share to principal; by the last few payments the split has reversed. When the borrower makes an extra payment partway through, the lender applies it to principal, and the remaining balance drops faster than the original schedule showed.
Common misconceptions
Myth: The principal is the total you will repay.
In fact: The principal is only the amount borrowed. The total repaid is the principal plus interest and any charges.
Myth: Extra payments always go to principal automatically.
In fact: Lenders apply payments according to the agreement. Borrowers who want extra money applied to principal can confirm how the lender handles it.
Myth: The principal cannot change once the loan is signed.
In fact: The principal balance falls with every payment that includes principal, and it can rise if charges are added to the balance under the agreement.
What to check
- The amount financed, which is the principal you actually receive.
- How each scheduled payment is split between interest and principal.
- How the lender applies extra payments.
- Whether any charges are added to the principal balance.
How this applies at Desert Rock Capital
At Desert Rock Capital, the principal is the amount you accept, from $100 to $3,000. If you are approved, you choose how much to accept, and because interest accrues on every dollar you borrow, a smaller principal means less interest. Loans are fully amortized with fixed biweekly payments, and there is no prepayment penalty, so paying early reduces the interest you pay.
Based on our loan requirements, loan amounts and application pages. Your actual terms are in the loan agreement.