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Principal Balance

The principal balance is the outstanding amount of money owed on a loan or debt. It represents the original amount borrowed or the initial balance of the debt, excluding any interest or fees that have been added over time

What You Need To Know

When a loan is taken out, the borrower is expected to repay both the principal amount borrowed and the interest charged by the lender. The principal balance decreases as the borrower makes payments towards the loan, reducing the overall debt over time. For example, if someone takes out a mortgage for $200,000, the principal balance initially starts at $200,000. As the borrower makes monthly mortgage payments, a portion of the payment goes towards reducing the principal balance, while the remaining portion covers the interest charged by the lender. Over time, as more payments are made, the principal balance gradually decreases.

It's important to distinguish the principal balance from the total amount repaid, which includes the interest and any applicable fees. The principal balance reflects the actual amount borrowed and serves as the basis for calculating interest charges and determining the remaining debt. When making extra payments towards a loan, the excess amount typically goes directly towards reducing the principal balance, which can help pay off the debt faster and save on interest costs.