Principal Definition

Principal has many uses, but in personal finances it typically refers to the amount of debt which is owed to a creditor. The principal is the amount on which periodic interest is charged. The principal of a loan will not always decline, even if regular payments are made, because new charges, accrued interest, and fees are added to the principal during each billing cycle.

Note that when paying off a loan, the principal is not necessarily equal to the principal balance because of daily interest which may have accrued on the account. On interest-only loans, the principal balance-by design-does not decrease.