What it is
The principal is the base amount of money in different financial transactions. For loans, the principal is the amount borrowed. When investing, this is the money that’s put into an investment vehicle.
This figure is often the basis for calculating your potential earnings from an investment or how much you’ll pay back when you take out a loan.
What it means for you
It's important to know the principal whether you’re investing or borrowing money. This number will allow you calculate how interest will accumulate for both loans and certain investments.
When borrowing money, the size of your principal may dictate how much you’ll end up paying in interest. A bigger principal might mean higher interest payments, and vice versa.
Take note that other factors affect loan repayment terms. Aside from the principal, there are other details to consider before entering a loan agreement.
When exploring investments, you’ll often find that they require a minimum starting amount. As an investor, your principal includes your initial investment plus any money you’ll add in the future.
Anything above that amount will make up your earnings or returns. If you decide to invest your earnings, they’ll be considered as part of your principal.
Keep in mind that fees may apply for both investments and loans.
