What is principal?
So, what is principal? In short, it is the amount of money you borrow when you take out a loan. This sum does not include interest or any other fees associated with the loan. For example, let’s say you want to borrow $10,000 to buy a car. The principal of this loan would be $10,000.
The interest on a loan is the amount of money you pay to the lender in addition to the principal. This additional sum is a percentage of the total amount that you have borrowed. In our previous example, let’s say the interest rate on your $10,000 loan is 5%. This means you will owe the lender an additional $500 (5% of $10,000), for a total debt of $10,500.
It’s important to remember that most loans require you to make monthly payments. These payments go towards both the principal and the interest on the loan. For instance, let’s say your monthly payment on the $10,000 loan is $250. Of this sum, $200 will go towards paying off the principal while $50 will go towards paying the interest.
Now that we’ve gone over what principal is in consumer loans, let’s review some key points. Principal refers to the sum of money you borrow when taking out a loan. It does not include interest or any other associated fees. Interest is the amount of money that you pay to the lender in addition to the principal and is typically a percentage of the total amount borrowed. Monthly payments on a loan go towards both the principal and interest charges.
If you’re considering taking out a loan, it’s important to understand all aspects of it before making a decision. We hope this post has helped shed some light on what principal is and how it works in consumer loans. As always, feel free to reach out if you have any questions!
See similar resources on article about primary residence, or article promissory note.