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Glossary

Principal

Principal is the original sum of money borrowed in a loan or invested in a financial product, not counting any interest, or the amount on which interest is calculated.

What Is the Principal?

In finance, the principal is the original amount of money involved in a loan, bond, or deposit, before any interest is added or paid. If someone borrows 10,000 in a loan, the principal is 10,000. If they deposit 5,000 in a savings account, the principal is that 5,000. The same word also appears in other settings, such as the principal-agent relationship, but in investing it almost always refers to this base amount.

How the Principal Works

Each payment on a loan usually covers two parts: interest on the remaining balance and a portion of the principal. As the principal is repaid, the outstanding balance falls, and so does the interest charged on it. For many fixed-rate loans, this gradual repayment is known as amortization.

With a bond, the principal is usually repaid in full at maturity. It is often called the face value or par value, and the periodic interest payments are calculated based on it.

With a savings account or certificate of deposit, the principal is the amount deposited. Earnings are calculated on that balance, and when interest is reinvested, compound interest allows the base to grow over time.

An Example

Suppose a borrower takes out a loan of 20,000 with a fixed annual interest rate. In the first year, interest is calculated on the full 20,000. If repayments reduce the principal to 15,000 by the next year, the following year's interest is calculated on 15,000 instead. Because the base is smaller, the interest charge shrinks as the loan is paid down. This example is hypothetical and uses no real rates.

Why It Matters to Investors

Understanding the principal helps investors compare what they put in or owe with what they earn or pay. Returns are often measured relative to the principal, and an investment that loses value can return less than the original principal. For borrowers, paying down the principal early reduces the interest that accumulates over the life of the loan. Knowing how much principal is at stake is a basic step in understanding any financial arrangement.

Updated October 15, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Interest

Interest is the cost of borrowing money or the return earned by lending it, usually expressed as a percentage of the amount borrowed or deposited over a set period of time.

Loan

A loan is a sum of money that a lender provides to a borrower, which the borrower agrees to repay over time, usually with interest and according to set terms.

Bond

A bond is a loan that an investor makes to a borrower, such as a government or company, in exchange for regular interest payments and the return of the principal at a set maturity date.

Compound Interest

Compound interest is interest calculated on both an initial amount and on the interest already accumulated, so balances grow faster over time than under simple interest.

Interest Rate

An interest rate is the cost of borrowing money or the return earned on saving or lending it, expressed as a percentage of the principal amount over a set period.

Face Value

Face value is the nominal amount printed on a financial instrument, such as the principal a bond promises to repay at maturity, which often differs from its market price.

Par Value

The stated face amount of a security, set by its issuer. For bonds it is the principal repaid at maturity; for stocks it is a nominal figure with little market significance.

Principal-Agent Problem

The principal-agent problem arises when one party, the agent, makes decisions on behalf of another party, the principal, but their interests are not fully aligned and information is unevenly shared.