Definition
Principal balance is the outstanding amount of money owed on a loan, excluding interest, fees, and other charges. It represents the original loan amount minus any principal payments made. Each loan payment typically includes both principal and interest, with the portion going toward principal gradually increasing over the life of the loan. The principal balance is what must be paid off to completely satisfy the loan obligation.
Formula
The principal balance decreases with each payment by the amount of that payment applied to principal (rather than interest).
Example
Principal Balance Over Time
On a $300,000 mortgage at 4%, the first payment might apply $432 to principal and $1,000 to interest, reducing the principal balance to $299,568. Ten years later, the same $1,432 payment might apply $650 to principal and only $782 to interest. The principal balance declines slowly at first, then accelerates in later years.