Principal

Definition

The principal is the original sum of money borrowed in a loan or invested, before interest or earnings. It is the base amount on which interest is calculated.

5 Must Know Facts For Your Next Test

1. Principal does not include any interest that accrues over time.
2. In simple interest calculations, interest is computed only on the principal amount.
3. Repayments on a loan are typically divided between paying off the principal and the accrued interest.
4. Increasing the principal amount will increase the total amount of interest paid over time.
5. The principal remains unchanged in simple interest calculations; it does not compound.

Review Questions

• What is included in the principal amount of a loan?
• How does increasing the principal affect the total interest paid?
• Does the principal change in simple interest calculations?

Related terms

Simple Interest: Interest calculated only on the original principal, not on accumulated interest.

Loan Term: The duration over which a loan must be repaid.

Interest Rate: The percentage at which interest is charged on a loan or paid on an investment over a specific period.