Definition
The principal is the amount actually borrowed and still owed, excluding interest and fees. Each regular repayment on a typical amortising loan covers the interest due and reduces the principal a little, so the principal falls over the term. On an interest-only loan the principal does not fall until a lump-sum repayment or refinance at the end.
Every loan has three moving parts: the principal, the cost of borrowing it and the time over which it is repaid.
Principal versus amount received
Read the offer carefully. Some lenders add establishment and other fees to the loan, so you borrow more than you receive. Others deduct fees from the advance. Both affect the true cost. To line offers up fairly, use our total cost of a business loan guide.
How principal falls
On an amortising loan, early repayments are weighted towards interest and later ones towards principal. That is why payout figures can feel high in the first year. With a balloon payment, part of the principal is left until the end.
Why it matters
Knowing your principal helps you decide whether to refinance, pay early or extend. ASIC Moneysmart has general explanations of how loans work.
Run the numbers on the true cost calculator, then make one enquiry if you want to explore options.
Common questions
Is the principal the same as the amount I receive?
Not always. If fees are added to the loan, the principal can be higher than the funds paid to you. If fees are deducted, you may receive less.
How do I see how much principal is left?
Ask the lender for a statement or payout figure, which shows the remaining principal plus any fees or break costs.
Does paying extra reduce the principal?
On many reducing-balance loans, yes. Check the contract for limits or fees on extra repayments.
Sources and further reading