The principal is also going to be a lump sum of money while the interest is going to be a percentage rate of that lump sum, also known as an APR or Annual Percentage Rate. The process of calculating these payments is called the amortization schedule. Each payment will go toward paying off the loan principal and the loan interest. It’s important to understand the distinction so that you fully understand how much you are paying for your loan and how your monthly payments work. In simple terms, you can think of principal as the amount you borrowed and you can think of interest as the amount you pay the lender. It's important to take note of recourse and nonrecourse loans as well. Principal and interest are both the main categories that make up your loan and loan payments. The Difference Between Principal and Interest The perk to this repayment plan is that your total payment is always the same, making it easier to work into your monthly budget.įor example, you might have a total payment of $50 with $30 going toward the original loan amount and $20 going toward the interest. This then results in even total payments and uneven payments toward the principal balance and the interest. For example, if your regular payments are $50 then they will be $50 for each pay period throughout the life of the loan. In this repayment plan, each payment is divided between the principal and the interest, and the total payment each month is always the same amount. The perk to using this repayment plan is that your regular payments gradually go down throughout the life of the loan.įor example, if your first payment is $100 then your next payment might be $75, and then $50, and so on. This then results in uneven total payments. For example, you might pay $50 toward the principal loan amount each month, while the amount you pay toward the interest each month varies.

In this repayment plan, each payment is divided between the principal and the interest, and the amount that goes toward the initial loan amount is always the same. These principal payments and interest payments could be set up as even principal payments or as even total payments. When your loan is set up, each payment will be set up to pay back the original amount borrowed and the extra interest. The loan principal is the amount you borrow and the loan interest is the amount you pay the lender for borrowing that money. You can think of a loan as having 2 parts: the loan principal and the loan interest. Amortization is the calculations that help figure out how your payments go toward the initial amount borrowed and the additional cost of interest. The principal payment on a loan is any payment that is going directly toward the original sum of money borrowed, rather than going toward the added interest. “The loan principal was $500 before interest.” But the principal balance of this loan would still be $500. For example, you might take out a loan for $500 and end up paying $550 total when adding interest and fees. In finance, this word refers to the initial amount, or the original amount, of a loan or mortgage. The second definition of the word principal comes from its use in the world of finance. “The principal addressed all of the students in the assembly hall.” One way to remember this definition is that the word principal has the word “pal” at the end of it, and the principal of the school is a pal to the students. The first definition of principal refers to a person’s job or station, like the principal of a school. The word principal has 2 different definitions.

“Stealing the toy went against Jimmy’s principles.” For example, you might use the word principle when talking about something you believe in, or something you believe to be right or good. The word principle refers to a rule, moral, belief, or truth. Luckily, their different meanings should make it a little easier to differentiate between the two of them. Both of these words sound the same and have very similar spellings, but they have very different meanings. The first thing we should get out of the way is the difference between the words principal vs principle. You might come across this term when getting a home mortgage, a payday loan, student loans, or setting up your 401K. This is the basic way interest and loan repayment works, allowing borrowers to get the money they need and lenders to make a profit on the loans they offer. The loan will generate interest, and this will be added to the original amount. A loan principal is the original amount of money borrowed via a loan.

Principal or principle for loans