What Is Principal?

Banking Term Definition | Last Updated: March 2026 | Browse All Terms

Definition
The original amount of money deposited or borrowed, before any interest is added. Interest is calculated based on the principal.

Example: "I borrowed $10,000 (the principal). Over 5 years at 6% interest, I'll pay back $11,600 total."

Why It Matters

Principal is the base amount on which all interest calculations depend. For savers, a larger principal earns more interest. For borrowers, making extra payments toward the principal reduces the total interest you pay over the life of the loan. This is why even small additional principal payments on a mortgage can save thousands of dollars and shorten the loan term. When you make a regular loan payment, part goes to interest and part goes to principal. Early in the loan, most of your payment covers interest. Over time, more goes toward principal.

Related Banking Terms

Interest Money a bank pays you for keeping your money in a savings account, or money you pay a bank for borrowing money (like a loan). Compound Interest Interest calculated on both the original amount and any interest already earned. Simple Interest Interest calculated only on the original amount (principal), not on any previously earned interest. Loan Money borrowed from a bank that must be paid back with interest over a set period.

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