Glossary term
Principal
Principal is the amount of money you borrow, or the amount you deposit, before any interest. On a loan, it is the balance that interest is charged against, and each payment's non-interest portion reduces it. On savings, principal is your own money, the base on which interest is earned.
Updated October 17, 2026 · Editorial Team
How Principal works in practice
When you take a loan, the principal is the amount financed: the price minus your down payment and trade-in, plus any fees or products rolled into the loan. Interest is calculated on whatever principal remains, so lowering principal is the main way to lower interest cost.
Say a car costs $30,000 and you put $6,000 down. Your starting principal is $24,000. If you financed a $1,200 service contract too, the principal would rise to $25,200, and you would pay interest on that extra $1,200 for the full term.
Paying extra toward principal, when your lender allows it without penalty, cuts interest and shortens the loan. Some lenders apply extra money to future payments instead, so it is worth asking that it go to principal.
Principal: quick questions
Is principal the same as the loan amount?
At the start, yes. After payments begin, principal means the remaining balance you still owe, not counting interest that has accrued.
What is a principal-only payment?
A payment you ask the lender to apply entirely to the balance rather than interest or future installments. It lowers the interest charged afterward.
Can fees become part of principal?
Yes. Fees, taxes or add-ons rolled into a loan become principal and accrue interest for the whole term.
Sources
- Regulation Z (Truth in Lending), 12 CFR Part 1026 — Consumer Financial Protection Bureau. Accessed October 17, 2026.
- Auto loans — Consumer Financial Protection Bureau. Accessed October 17, 2026.
We cite primary sources: regulators, central-bank data and federal agencies. Worked examples on this page are our own calculations. See our methodology.
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