Principal: The Core Amount of Your Business Loan
Understand what principal means in lending, how it differs from interest, and how principal payments affect your loan balance.
What Is Principal?
Principal is the original amount borrowed—the core debt that must be repaid. When you take a $500,000 loan, the principal is $500,000. Interest is the cost of borrowing, charged as a percentage of the outstanding principal.
Each loan payment typically includes both principal and interest. As you make payments, the principal balance decreases, and with it, the interest charged.
Principal vs. Interest
Understanding the difference matters for your financial planning:
| Principal | Interest |
|---|---|
| The amount borrowed | The cost of borrowing |
| Decreases with each payment | Calculated on remaining principal |
| Same total regardless of rate | Varies based on rate and time |
| Builds equity when reduced | Does not build equity |
How Principal Payments Work
In a standard amortizing loan:
- Early payments are mostly interest
- Later payments are mostly principal
- Total principal paid always equals original loan amount
- Extra principal payments reduce future interest costs
- Interest-only periods delay principal repayment
Accelerating Principal Paydown
Paying extra principal can save significant interest over the loan term.
Check for prepayment penalties before making extra principal payments. If there are no penalties, even small additional principal payments can substantially reduce your total interest cost and payoff time.
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Read more →Important Disclosure
Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
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