DayCents

Principal

Principal is the original amount you borrow or invest, separate from the interest on it. On a loan, each payment splits between interest (the cost of borrowing) and principal (which actually shrinks the debt) — and early on, most of a mortgage payment goes to interest.

Paying extra directly toward principal shortens the loan and cuts total interest, because future interest is charged on a smaller balance. An amortization schedule shows exactly how the principal-versus-interest split shifts toward principal over the life of the loan.