What does the term 'principal' refer to in a loan?

The term 'principal' in the context of a loan specifically refers to the initial amount of money borrowed or the portion of the loan that is still owed, excluding any interest or additional fees. This is a fundamental concept in finance, as it represents the main sum that is subject to interest calculations and repayment terms. Understanding principal is essential for grasping how loans work, since interest is typically calculated based on this amount.

For instance, if someone takes out a $10,000 loan, the principal is $10,000. Over time, as payments are made, the principal amount decreases, which can affect the total amount of interest paid over the life of the loan. Knowing what principal means helps borrowers make informed decisions about repayment strategies and financial planning.