principal
The original sum of money borrowed in a loan, or the amount invested before interest is added.
Example
“After two years of payments, she had reduced the principal on her mortgage by $8,000.”
Memory Tip
PRINCIPAL is the PRINCIPAL (main) amount — the original sum, not the interest.
Why It Matters
Understanding principal is crucial because it forms the foundation of how interest is calculated on your loans and investments. When you borrow money or invest, knowing your principal helps you track how much of your payments go toward reducing what you owe versus paying interest charges.
Common Misconception
Many people believe that the principal and the total amount they repay are the same thing. In reality, the principal is just the starting amount, and the total repayment includes the principal plus all the interest charges accumulated over the loan term.
In Practice
If you borrow $10,000 to buy a car at 5 percent annual interest over 5 years, your principal is $10,000. By the end of the loan term, you will have paid back approximately $12,750 total, which means $2,750 went to interest charges while the original $10,000 was your principal being gradually repaid.
Etymology
From Latin 'principalis' meaning 'first, chief' — the chief (original) amount.
Common Misspellings
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