Definition
The Loan Principal Amount refers to the original sum of money borrowed in a loan. It’s the amount upon which the interest is applied and calculated. Over time, as you repay your loan, it’s this principal amount that is gradually reduced.
Key Takeaways
- The Loan Principal Amount is the original sum of money borrowed in a loan or invested. It is the amount on which the interest is computed, minus any payments that have been made towards it.
- It’s the main part of a loan payment, apart from interest. The principal amount decreases with each payment made, reducing the balance of the loan over time.
- In terms of a mortgage, the principal amount refers to the original size of the loan which doesn’t include interest. Down payments are typically subtracted from the principal amount and the remaining value is the loan’s principal balance.
Importance
The finance term “Loan Principal Amount” is important as it refers to the original amount of money borrowed in a loan.
It serves as the basis on which interest is calculated and charged.
Understanding the principal amount is crucial in managing any form of debt as it will directly influence the total repayment amount, the monthly installments, and the duration of the loan.
While making repayments, the amount paid above the interest goes towards reducing the loan principal, which in turn decreases the interest charged on future repayments.
Therefore, a clear comprehension of the loan principal amount is key to making informed decisions about borrowing, repaying, and overall debt management.
Explanation
The principal amount of a loan serves as the initial sum of money that someone has borrowed from a lender. This sum is the core funding a lender provides to a borrower, before interest or any other charges are taken into account.
The borrower is obligated to pay back the principal amount over a specified duration, which forms the basis for the agreed repayment structure between the borrower and lender. Its purpose is to provide necessary funding to the borrower for a range of needs including buying a house, starting a business, funding education or even consolidating debts.
The use of the loan principal amount extends to forming the basis for additional costs associated with the loan. For instance, the interest that the borrower is obligated to pay over the life of the loan is calculated based on the principal amount.
Moreover, the calculation of the monthly installment for the loan repayment also revolves around the principal amount and interest rate. Simply put, the loan principal is the base figure that determines the cost and structure of a loan, influencing the total amount to be repaid, the loan tenure as well as the amount of interest that accumulates over time.
Examples of Loan Principal Amount
Home Mortgage: When a person borrows money to buy a house, the original amount they borrow is the loan principal. For example, if you take out a mortgage for $200,000 to buy a house, the loan principal amount is the initial $200,000 you borrowed.
Student Loans: A university student takes a loan of $30,000 to cover their tuition fees for a degree. That initial borrowed $30,000 is the loan principal amount. The student will have to pay this amount back, plus interest and probably fees, over the repayment period.
Car Loans: A person decides to borrow $15,000 to buy a car. The loan principal amount in this case is the $15,000 they initially borrow. They’ll need to repay this amount, with interest, over the time as agreed with the lender.
FAQs on Loan Principal Amount
What is a Loan Principal Amount?
The Loan Principal Amount refers to the original sum of money borrowed in a loan. It is the amount on which the interest is calculated and paid.
How is Loan Principal Amount calculated?
The Loan Principal Amount is essentially the remaining portion of the initial loan amount that has not yet been repaid. It is calculated by deducting the sum of all the repayments made toward the loan from the initial loan amount.
Does the Loan Principal Amount affect the interest rate?
Yes, the interest rate of a loan is typically calculated based on the Loan Principal Amount. Higher the principal, higher the amount you will have to pay as interest.
What happens when the Loan Principal Amount is paid off?
Once the Loan Principal Amount is completely paid off, you no longer owe any money to the lender. However, you may still owe interest depending on your loan agreement.
Can you pay more towards the Loan Principal Amount?
Yes, paying more than your regular payment can reduce the Loan Principal Amount. This can shorten the length of your loan and reduce total interest paid. However, some lenders may charge prepayment penalties for doing this.
Related Entrepreneurship Terms
- Amortization Schedule
- Interest Rate
- Loan Term
- Monthly Payment
- Outstanding Balance
Sources for More Information
- Investopedia: A comprehensive online resource dedicated to investing and personal finance education.
- Bankrate: A reliable source for personal loans with useful insights and advice on loan principals.
- U.S Small Business Administration (SBA): Offers advice on small business loans, definitions, and more, including information about loan principal.
- NerdWallet: Provides clear information on financial topics, including loan principals, to help consumers make the best decisions.
