Principal
The original amount borrowed on a loan.
Principal is the original sum of money borrowed before interest is added. As you make loan payments, a portion goes toward reducing principal and the rest covers interest. Early in a loan's life, more of each payment goes to interest; over time, the balance shifts toward principal reduction. Paying extra toward principal accelerates payoff and reduces total interest paid.
Example
On a $100,000 business loan, the first monthly payment of $1,200 might apply $550 to principal and $650 to interest—by the final year, $1,100 goes to principal and only $100 to interest.
Why It Matters for Your Business
Understanding the principal-interest split in your payments reveals how quickly you're actually paying down debt and how much extra payments can save.
Related Terms
More Banking Terms
ACH
Automated Clearing House - an electronic network for financial transactions.
APR
Annual Percentage Rate - the yearly cost of borrowing including fees.
APY
Annual Percentage Yield - the real rate of return on savings including compound interest.
Bank Reconciliation
Matching bank statements with internal records to identify discrepancies.
Business Checking
A bank account designed for business transactions.
Related Financial Guides & Resources
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