Principal amount is the face value of a loan or debt guarantee. Borrowers repay a portion of the principal with each monthly payment, and in mortgages, the vast majority of the payment will be interest at the beginning. In other investments, principal refers to the original investment amount.
The principal amount is the face value of a loan or debt guarantee. When a person or business borrows a certain amount of money through a loan, the amount borrowed is called the principal amount. In most cases, a borrower will repay a portion of the principal with each monthly payment he makes on a loan.
A common area where borrowers know their principal amount is with their mortgages. When a borrower takes out a $100,000 United States Dollar (USD) mortgage to buy a home, the principal amount is $100,000 USD. This does not represent the total amount of money that will be paid to the lender over the life of the loan. The lender will also be paid interest in exchange for lending the money to the borrower.
When paying off a traditional mortgage, a borrower will make regular monthly payments to the lender. Each payment will be made up of interest and principal. At the beginning of the mortgage, the vast majority of the payment will be interest and a small percentage will be principal. For example, with a $1,000 mortgage payment, $950 could be interest, and the remaining $50 would be principal. This $50 USD will go towards the amount borrowed and will reduce the amount of money owed to the lender.
As principal decreases over time, more and more of the mortgage payment will go toward principal. At some point, most of the mortgage payment will be converted to principal, and only a small amount of interest will be paid each month. When the entire principal has been repaid, the loan will be withdrawn and the monthly payments will cease.
In addition to mortgages, the term “principal amount” is used in other areas as well. In the bond market, investors sometimes refer to the face value of the bond as the principal amount. When an investor gets involved with the bond market, he is essentially lending money to a corporate entity or government entity. The entity then pays the investor a fixed amount of interest over the life of the bond. At the end of the term, the investor recovers the amount of capital that he originally invested.
In other forms of investment, principal is used to describe the amount that was the original investment. In a trading account, for example, if an investor’s account was valued at $10,000 USD and he or she had originally invested $6,000 USD, the principal amount would be $6,000 USD. The remaining $4,000 USD would be the profit from the investments.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
