# What Is Loan Principal?

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Definition

If you have borrowed money, loan principal is the original amount of money you borrowed from a lender and must repay. In addition to the principal, you may also have to pay interest charges and other fees until you have reduced the principal to \$0.

### Key Takeaways

• The loan principal is the amount of money you borrow from a lender.
• As you repay your loan, your loan principal will shrink until it eventually reaches \$0 and you have repaid the loan.
• In addition to the loan principal, you may also have to pay for interest and additional fees.

## How Loan Principal Works

The loan principal is the amount of money you borrow from a lender. The loan principal can be found in a mortgage, car loan, student loan, credit card balance, and many other loans.

Let’s say you want to buy a house that costs \$250,000. You decide to put down 20%, or \$50,000. Now the loan principal on your mortgage is \$200,000. Your lender then charges a fixed annual interest rate of 3% on that \$200,000 across a 30-year mortgage.

When you make your first mortgage payment, you’ll find that your total loan principal is still \$200,000, but you’re also on the hook for an interest payment every month, too.

With a mortgage calculator you can quickly find out what your monthly payment will be.

In this example your monthly payment would be \$843, not including property taxes and other costs like insurance. Of that \$843 payment, \$500 takes care of your interest charge, and the remaining \$343 goes toward the principal of your loan. Once you make your first monthly payment, your loan principal of \$200,000 falls to \$199,657. Next month, interest is calculated based on that amount of principal, the rest of your payment goes toward the principal, and so on for 30 years until the loan balance reaches zero.

### Tip

When they are deciding how much money to lend you, and what interest rate to charge, lenders consider whether the payments are reasonable for you after looking at your income and other debts. Typically, this is expressed as a debt-to-income or DTI ratio

### Interest vs. Principal

Interest is what you pay the lender to borrow the money. The loan principal is the actual amount of money that you’re borrowing. At first, most of your monthly payment will go toward interest—typical at the start of installment loan repayment—due to amortization, which is the process of determining the amount of loan payments spread out over time.

When a large loan is amortized, the bulk of your monthly payments will initially go more toward reducing interest rather than reducing the principal. That's because you'll owe more interest when your principal is large. As your monthly payments chip away at the principal, the interest charges shrink, and more of your monthly payments go toward reducing the principal. Your monthly statement will detail exactly how your payment is split.

Toward the end of the loan’s lifetime, most of your payment will go toward the principal. A loan amortization schedule shows how much of the monthly payment pays off the principal and how much goes toward interest.

Using our mortgage example from earlier, by the last month of your loan repayment, \$2 will go toward interest and \$841 toward the principal.

### Note

If you want to repay your loan principal faster, look into applying extra payments to your principal only. But first, find out if your lender charges an early repayment penalty, also known as a prepayment penalty, so you can plan accordingly and not get hit with a fee.

## Where To Expect Loan Principal

You’ll most likely see loan principal in an installment loan, where you repay the loan with monthly or scheduled payments over a period of time, such as five or 30 years. This may include:

• Mortgages
• Home equity loans
• Car loans
• Student loans
• Personal loans
• Payday loans

## How To Identify Your Loan Principal

You should identify your loan principal on your initial loan disclosure documents and within all monthly statements going forward. If you can’t easily identify your loan principal, contact your lender.

When you apply for a home loan, your bank’s closing disclosure will state your total loan amount and interest payment on page one, along with your monthly principal and interest payment.

For a student loan, your loan principal is in your initial disclosure statement, in exit-counseling documents, and on your billing statements.

If you have a personal loan, you can learn about your loan principal in your monthly statement or online account.

## Loan Principal vs. Loan Balance

In most cases, the overall balance of what you owe on your debt will consist of the principal and any interest that may have accrued, such as with an unsubsidized student loan. Interest with many loans accrues daily.

Therefore, your payoff amount may differ from your balance or your loan principal and might include a prepayment penalty, fees, or additional costs. Your initial loan principal could be \$200,000, but your current loan principal or balance may be higher due to interest, homeowners insurance, and property taxes. The loan principal or balance will also decrease over time as you make your monthly payments and repay the loan.

## Loan Principal and Taxes

For Individuals: Individual taxpayers may be able to deduct the amount they pay for loan interest each year, depending on the type of loan. For example mortgage interest may be deductible and student loan interest payments may qualify for a deduction, too. Payments toward your principal balance, however, are not tax-deductible.

For Businesses: The principal amount of a business loan is only part of the amount you paid for the business asset (a company car or building, for example). The total amount you paid (called cost basis) includes any down payment, costs to buy the asset, and other initial costs. You can depreciate this cost (spread it out) over the lifetime of the asset, giving your business tax deductions over this period. Businesses can also write off interest expenses paid each year, with some limitations.

## What is principal loan amount?

Principal loan amount, or principal, is simply the amount of money you initially borrow from a lender. Principal does not include any fees or interest the lender charges, and it does not include any upfront payments you might make, such as a down payment on a house or car.

## Is principal the same as loan balance?

No, but they are related. Principal is the initial amount of money you borrowed from a lender when you first took the loan. The loan balance, however, is the current amount you owe at any given time, after payments have reduced the principal, and after any fees or interest have been added and accounted for.