Principal is the starting sum in an interest calculation: the amount lent on a loan, or the amount deposited in a savings account. Interest is the price of using that money, so it is kept separate from the principal. On a loan, the remaining principal is the part of the debt that is still owed apart from interest; each regular payment is split between interest and a reduction of principal.
Formula
In the simple interest formula the principal is the letter P:
I = P × r × t total = P + I
- P: the principal in dollars.
- r: the annual interest rate as a decimal.
- t: the time in years.
Example
A $9,000 loan at 3% simple interest for 5 years has a principal of $9,000. The interest is 9,000 × 0.03 × 5 = $1,350, so the total repaid is $10,350. With compound interest, the principal is still the starting amount, but later interest is calculated on principal plus earlier interest.
Common mistakes
- Treating the principal as the total owed. The balance owed includes interest that has accrued.
- Assuming a payment reduces principal by the full amount. On an amortizing loan, early payments mostly go to interest. With several debts, the snowball vs avalanche guide shows how extra payments aimed at principal change the result.
See the simple interest formula guide for worked examples and the interest calculator to test other numbers.