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.

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.