Whether you're looking for a
personal loan
or already have one, you must understand that what you repay
the lender will consist of the amount you borrowed and the
interest charged on your loan. Keep reading to learn what
loan principal is, how to calculate your loan principal, and
how you can pay off your loan principal early.
Understanding Loan Principal
The word principal, if viewed in the context of loans,
means the original amount owed by the borrower to the
lender. For instance, if you get a loan of $40,000, then
this amount, i.e., $40,000, will be considered the loan
principal amount.
Loan Principal vs. Interest
When you borrow, you are responsible for paying both the
loan amount and the interest charged on the borrowed amount
at a fixed or variable interest rate. You need to understand
the difference between paying off the loan principal payment
and paying off the interest.
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Loan Principal
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Interest
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The loan principal is the amount of money the
borrower still owes to the lender.
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Interest is the fee the borrower must pay to
the lender for borrowing a certain amount of
money. The interest is usually based on an
Annual Percentage Rate (APR).
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The payment made for paying off the loan
principal is called the principal payment.
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Unlike interest payments you can make in
installments, you can pay off your loan
principal in a lump sum.
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The amount of money that goes off towards
paying the interest is called the interest
payment on a loan.
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These interest charges are usually paid off in
installments.
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How To Pay the Principal Back
When you start making payments on a large loan, most of the
monthly payment will go towards interest, and some will be
on the principal. As your payments continue, you'll slowly
pay more in principal and less in interest.
Some lenders allow for principal-only payments. You'll
have the option to make extra payments to the principal on
top of your minimum amount. Other lenders require notice if
you want to apply additional money to the principal. Check
with your lender to see what they offer.
Where To Look To Find Your Loan Principal
To find your loan principal, look at your loan's monthly
statement. The statement will highlight the amount you owe
to your lender and the monthly payments you need to make to
clear the debt. Each monthly payment you make will be
deducted from the principal balance, and this will help you
understand the loan debt amount that needs to be repaid.
For example, your mortgage loan account statement will show
interest rate, monthly payments, daily interest (the
interest added to your loan daily), and principal balance.
You can also see your loan principal on your student loan
statement.
You should immediately contact your lender for this
information if you cannot see the loan principal in any of
your billing statements or documents. This is because the
lender must provide detailed information regarding the loan
principal, the monthly loan repayment, add-on charges, late
fees, the interest rate, or any other extra payments that
may be added to your loan payment.
How To Calculate the Loan Principal Amount
To calculate the loan principal amount, you need to deduct
the down payment from the loan amount. The amount left is
the revised loan principal amount, from which you need to
subtract the monthly repayment amount from the principal
balance.
Example Of Loan Principal
Here's how to calculate the loan principal amount:
You get a $9,000 loan. The interest rate applicable to the
loan principal has been fixed at 5%. After making a down
payment of $2,000, your initial loan principal amount is
$7,000 (loan amount - down payment = loan principal amount).
Your lender will multiply your annual interest rate by your
outstanding balance but divide it by 12 because you have
monthly payments. So if you owe $7,000 on your mortgage and
your
fixed interest rate
is 4%, you'll initially owe $23.33 in monthly interest
($7,000 x 0.04 ÷ 12). The rest of your payment is applied to
your principal.
How To Pay the Principal on a Loan Faster
Some lenders allow you to
repay the loan
before the stipulated date. You can do this by paying off
the loan principal with larger payments than required. If
you didn't choose a variable-interest loan, the interest
rate remains fixed, and the principal amount on which the
interest is charged gets reduced significantly. So, the
amount of money you need to pay as interest each month is
less. This, in turn, helps you pay back the loan amount in
fewer monthly installments.
Is It Better To Pay the Principal or Interest?
You need to repay both the loan principal as well as the
interest. However, paying interest on your loan principal
costs you more money. The higher the loan principal, the
more interest you need to pay. If you pay off your loan
principal quickly, you will spend less on interest payments.
This will also help you to repay the entire loan amount
quickly. However, some lenders do charge a prepayment
penalty. Be sure to read your loan agreement's terms and
conditions carefully.
The Bottom Line
Before getting a business, personal, or student loan, you
must understand the relationship between loan principal and
interest payment. Paying off the principal faster can
drastically reduce the money you need to repay your loan.
Before deciding on a particular loan offer, compare
different available loan options. This will help you choose
the most financially viable loan option. However, a
good credit score
and a healthy
credit history
will allow you many loan options to choose from. So, try to
maintain a good credit history.
Remember to carefully read the fine print before signing a
loan agreement
to know exactly what is expected of you and how much you
need to pay.