If you borrow money from a lender, the loan principal is the original amount of money you borrow and must repay. In addition to the principal, you may also have to pay interest charges and other fees. Throughout the loan’s lifetime, you’ll make payments and eventually reduce the principal to $0.
Learn how the loan principal works on with the money you borrow so that you can make smart repayment decisions on any debt you owe.
What Is Loan Principal?
The loan principal is the amount of money you borrowed from a lender. The loan principal can be found in a mortgage, car loan, student loan, credit card balance, and many other loans.
If you want to buy a house for $250,000, for example, you may need a home loan. If you don’t put any money down, your initial loan principal is $250,000.
If you borrow $60,000 to pay for your college degree, you may take out a student loan. In this case, your loan principal is $60,000.
When deciding how much to lend you in loan principal, 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.
How Loan Principal Works
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.
In this example, your monthly payment would be $843. Of that payment, $500 takes care of your interest balance, and the remaining $343 goes toward the principal of your loan. Once you make your first monthly payment, your loan principal of $200,000 goes down to $199,657.
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 something called amortization.
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.
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 a Loan Principal
You’ll most likely see a 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:
- Home equity loans
- Car loans
- Student loans
- Personal loans
- Payday loans
- Title loans
How To Identify Your Loan Principal
You should identify your loan principal on your initial loan disclosure documents and bills 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 Principals and Taxes
The amount you pay in interest on your loan may be tax-deductible, such as with mortgage interest. Any payments you make toward your principal balance, however, probably can’t be deducted. If you’d like clarity on how paying your loan principal affects your taxes, don’t hesitate to consult a CPA or tax professional.
- The loan principal is the amount of money you borrow from a lender.
- As you repay your loan, your loan principal will go down until it eventually reaches $0.
- In addition to the loan principal, you may also have to pay for interest and additional fees.