what is principal 
principal is the original sum of money that s borrowed in a loan or placed into an investment the term translates to first in importance in latin and a loan or investment begins with this amount principal serves as the foundation for calculating interest on a loan or for the returns on an investment amortization schedules and other components of a transaction also rely on principal it s also the face value of a bond that will be returned to the bondholder when the bond matures principal also refers to the leader of a company or the primary parties involved in legal contracts the concept of principal is pivotal for understanding your costs and your potential financial returns whether you re taking out a mortgage investing in bonds or starting a business understanding the principal of a loanthe initial amount you borrow when you accept money to purchase a car a house or education is referred to as the principal it forms the basis upon which interest rates and repayment conditions are applied it s the money you receive from the lender and must repay during the loan period along with interest and fees principal can also refer to the amount still owed on a loan over time there are essentially two kinds of principal balances in the context of loans let s say you take out a car loan with an initial principal balance of 20 000 your outstanding principal might be reduced to 16 000 after a year of making payments the interest for future payments is calculated based on this new outstanding principal the size of the principal amount is directly proportional to the overall cost of the loan a higher principal will result in higher interest payments over the life of the loan assuming that the interest rate and loan term remain constant understanding your principal amount is essential for determining whether a loan is within your budget 