The loan principal is the original amount of money you borrow from a lender. All loans start with a principal and accumulate interest over the course of their repayment period.
If you are looking to take out a large loan and plan to pay it off over a period of time, you will likely notice something called the loan principal. When you get a loan, you agree to pay a fee, most often a percentage of the loan amount, for the privilege of using someone else’s money. That percentage fee is your loan’s interest. The base loan amount is your principal.
Borrowers commonly use loans for
- big purchases such as
- or to
- fund various expenses and improve cash flow (personal loan).
All loans start as loan principal, the initial amount of money that you are borrowing. Over time, loans accumulate interest. More often than not, they also accumulate other fees, but these additional fees do not change the loan principal.
Continue reading to learn more about loan principal, how it varies from loan interest, how loan principal affects your taxes, and more. Understanding your loan principal is critical for making smart repayment decisions.
What is loan principal?
The loan principal is the initial amount of money you are borrowing. Whether you are taking out the loan to make a down payment on a house, to pay college tuition, to purchase a new car, or for some other purpose, this initial amount will always be called the loan principal.
Principal and interest on a student loan
For example, if you need to take out a loan to pay for college, you may take out a student loan. Tuition and fees cost $65,000, and you already have $5,000 saved, so you need to take out a $60,000 loan. In this case, your loan principal is $60,000. The same logic applies to any other type of loan you are taking out.
Interest vs. principal balance
Your payments toward your loan are normally broken into two portions — the loan principal and the loan interest. You can think of the principal as the amount of money you borrowed from the lender and the interest as the amount of money you will pay to borrow and use someone else’s money. Until you you pay back the full principal to your lender, you will have to pay the agreed-to interest rate on the balance still outstanding.
Consider the case of a mortgage loan
Say you take out a loan to buy a home, aka a mortgage loan. Your monthly mortgage payments will go toward both principal and interest, You can learn how to calculate your monthly mortgage payment here.
Annual percentage rate (APR)
When you take out a loan, it will come with a set of terms that you and your lender have agreed to. This will include something called the APR, or the annual percentage rate. The APR reflects the amount of interest you should expect to pay on your loan. It is a percentage of the total amount of the loan. Your lender will propose an APR based on your creditworthiness. If you have high credit scores, your lender will likely offer you a lower interest rate.
Keep in mind that you are not obligated to accept any lender’s offer. Loan terms, including the interest rate, should always be negotiable to some extent, though flexibility will vary from one lender to another. Make sure you shop around and don’t just accept the first loan offer you get.
Student loan APR
Let us use the same example from above. You are looking to take out a $60,000 loan to cover the cost of your college degree. Your loan principal is $60,000. Your APR is fixed at 3% across 10 years.
When you go to make your first monthly payment, you should expect to make a payment toward your principal and toward your interest. In this example, your monthly payment will be $579. In your first payment, $429 of that $579 will go toward the principal and $150 will go toward the interest. After this first payment, your loan balance will go down to $59,421.
You may be wondering why so much of the monthly payment in the example above went toward interest. You would be right to wonder — $150 certainly is not 3% of $579. (It’s more like 26%.) Why does so much of the monthly payment go toward the interest, rather than the principal?
This is due to something called amortization and is typical at the start of a loan repayment series. When you start to pay off a large loan, most of the minimum monthly payment will go toward the interest. A relatively small amount will go toward your principal. This is because the higher principal generates higher interest, and interest owed should be paid back first. Toward the end of the loan’s repayment schedule, most of your payment will go toward the principal.
Loan amortization calculators
One way to get a better handle on this amortization stuff is to play around with an online loan amortization calculator. To better understand the reasoning behind this and similar mortgage calculators, see our article on calculating your monthly mortgage payment.
Loan amortization schedule
A loan amortization calculator generates a loan amortization schedule much like the one you’ll receive when you take out a real-world loan. This makes a loan amortization calculator a great tool for seeing how much of your monthly payment would go toward the principal and how much would go toward interest for loans with various rates and terms.
When you receive a loan offer, it will come with a loan amortization schedule, and you should be sure to review it and ask any questions you may have before sealing the deal with the lender.
A specialized loan calculator for refinancing
We would be remiss if we failed to mention that online calculators can also be useful for helping you decide if you should refinance an existing home loan. Punch your numbers into the following calculator to see if refinancing is something you should consider.
Amortization and your monthly payment
Regardless of whether your payment is going mostly toward interest or principal does not affect how much you pay each month. As long as you pay at least your minimums according to the schedule set by your lender, your monthly payments will stay the same.
For example, using the same scenario as above, when you make your last payment 10 years later, your monthly payment will still be $579. However, $577.92 of that payment is going to your principal and only $1.44 is going toward interest.
Beware of negative amortization
Some loans may allow you to pay less each month than you would need to pay to get them paid off during the loan term. Be careful with such loans. If your monthly payments during (say) a year do not cover the interest accumulated over the same period, the interest you failed to pay will, in essence, turn into principal. It will still show as accrued interest on documents, but it will affect the interest you owe like principal. This means it will increase the total interest you owe, since, in effect, your loan principal has grown.
Basically, with a loan like this, you just keep borrowing more money with every payment cycle. This is called negative amortization.
Alternative pay-off schedules
Some loans have alternative pay-off schedules, which allow you to pay more toward your principal sooner than would be expected using the standard amortization schedule. These are called principal-only payments. Some loans allow for an additional monthly payment, on top of the minimum amount, that goes exclusively toward your principal. You would pay your minimum amount as scheduled and then make an additional payment.
Arrange principal-only payments with your lender
This is a great way to shorten the term of your loan, but it won’t necessarily lower your monthly mortgage payments. In order to do this, some lenders require advance notice that you plan to make an additional payment toward the principal only. Additionally, not all lenders offer this option, so make sure you double-check with your lender before planning to do this.
Why pay extra principal rather than extra interest?
You may be wondering if you can pay off all your interest at the beginning. Remember, however, that interest charged is a reflection of the principal amount. The only way to reduce the total interest you have to pay is to reduce your principal more rapidly than required by your amortization schedule. Thus, if you have extra cash, you should use it to pay off your principal first, rather than your interest.
Could there ever be exceptions to this rule? Aren’t there always?
Since you can deduct interest payments on certain types of loans, such as mortgages and student loans, your tax situation could make a different repayment approach best in your case.
To figure out which approach is best given your unique circumstances, a good first step (good because it costs you nothing) is to see if some free tax help clarifies matters for you.
A final consideration is something called an early repayment penalty, or a prepayment penalty. Some lenders may charge a fee for paying off your principal sooner than was scheduled. Make sure you review the terms of your loan before you make any principal-only payments.
Where to find your loan principal
Your initial loan disclosure documents should make it easy to identify your loan principal. If you are unable to find your loan principal on these documents, be sure to quickly contact your lender to make sure that the terms of the loan are clear.
Find your loan principal for installment loans generally
Installment loans, or loans where you pay a fixed monthly amount over a scheduled period of time, typically between 5 and 30 years, will often make your loan principal easy to locate. Some loan servicers’ websites will even provide colorful graphics showing your outstanding principal and accrued interest.
Find your loan principal for a mortgage
On a home loan, your bank’s closing disclosure will clearly state your total loan amount or principal on the first page. On student loans, your loan principal is also found in your initial disclosure statement, in exit-counseling documents, and in your billing statements. Both the U.S. Department of Housing and Urban Development and the U.S. Department of Education provide billing statements that break down where your payments are going and the overall balance.
Whenever you go to make a monthly payment, you will also find a breakdown of how much money you owe toward your principal balance and how much you owe toward interest or fees on the monthly statement.
Loan principal vs. loan balance
The loan principal is the initial amount of money you borrowed. However, this is not the same as your loan balance. The overall balance of what you owe on your loan will be the sum of the principal and any interest you may have accrued over time.
The total amount to pay off your loan will likely differ from your loan principal due to the interest you have accumulated as well as any additional fees or penalties, such as a prepayment penalty or a late fee.
Home loan example
For example, when you look at your monthly statement for your home mortgage, you will find both your loan principal and your loan balance. Even if you have made several payments toward your loan, you may find that your loan balance is higher than the loan principal. This could be due to interest, homeowners insurance, and property taxes.
Do not worry. Over time, your loan balance will decrease as you make your monthly payments and pay off the loan. Just be sure to make these payments according to the monthly schedule in order to avoid late fees!
Learn more about home loans, and see which loans you qualify for and which loans and lenders best match your needs, by using our search and comparison tools.
How does the loan principal affect taxes?
The good news is that the amount you pay toward the interest on your loan may be tax-deductible. However, any payments you make toward your principal balance are not deductible. This means that at the beginning of the loan repayment, you may be paying more toward your interest, but you will be able to deduct these payments on your taxes.
Tax preparation software or a tax professional can help you determine how your loan payments will affect your tax liability.
How do you find the principal of a loan?
The principal of the loan is the amount you originally borrowed from a lender, not including interest or fees. You should be able to find the loan principal on your initial loan disclosure documents and monthly statement balance.
What happens when you pay off the principal on a loan?
When you pay off the principal on a loan, you have presumably paid off your loan entirely! Your last payment should completely pay off the principal of the loan, assuming you do not have any additional fees.
Can you pay off the principal before interest?
You can make additional principal-only payments toward your loan on top of your minimum monthly payments, but you cannot make minimum monthly payments that do not include interest.
Does paying down principal lower monthly payments?
No, assuming you are making one minimum monthly payment per month, paying down principal does not lower monthly payments. You should still pay the same amount every month. What paying down your principal may do is shorten the term of your loan, meaning you pay it off earlier.
If lowering your monthly payments is your goal, you may have options. If, for instance, you have a mortgage loan, you can read our article about about how to lower your monthly mortgage payments for useful tips on how to do just that.
- The loan principal is the amount of money you borrow from a lender.
- Monthly repayments will go toward the loan principal and the interest, which is the cost of the loan.
- Over time, your loan principal will start to decrease until it reaches $0, which means your loan has been repaid.
- You can try to shorten the time it takes to repay your loan by making additional monthly payments toward the principal only.
View Article Sources
- Amortization Calculator — Zillow
- Closing Disclosure Explainer — Consumer Financial Protection Bureau
- Student Loan Repayment — Federal Student Aid, U.S. Department of Education
- Helpful background articles by Credit Karma, and from money management and banking sites — Various
- Let FHA Loans Help You — U.S. Department of Housing and Urban Development
- Understanding Your Federal Student Loan Documents — American Bar Association
- Best Mortgage Refinance Lenders — SuperMoney
- Best Personal Loans — SuperMoney
- How to Calculate Your Monthly Mortgage Payment — SuperMoney
- Get Free Tax Help — SuperMoney
- How To Lower Your Monthly Mortgage Payment — SuperMoney
- What Is an Installment Loan? Definition & Examples — SuperMoney
- When Is The First Mortgage Payment Due? — SuperMoney