Definition
In finance, the principal is the original amount of money borrowed or invested, separate from interest or fees. When you take out a loan, the principal is the amount you received. As you make payments, part of each payment reduces the principal balance while the rest covers interest charges. The remaining principal is also called the outstanding balance.
Formula
Each loan payment is split between principal and interest. The principal portion directly reduces your outstanding balance, while interest is the cost of borrowing.
Example
Mortgage Principal Example
If you take out a $300,000 mortgage, the principal is $300,000. Your monthly payment might be $1,432, but only a portion goes toward principal. In month one, perhaps $432 reduces the principal to $299,568, while $1,000 covers interest. Over time, more of each payment goes to principal as the balance decreases.