What is Principal Amount in Loan? – Simple Definition & Complete Guide
What is Principal Amount?
The principal amount is simply the original money borrowed from a bank or lender before any interest is added.
Example of Principal Amount
- Loan Taken: ₹50,000
- Interest: ₹5,000
- Total Repayment: ₹55,000
Principal = ₹50,000
Tip: Paying extra principal early can save you interest and reduce the loan tenure.
Difference Between Principal and Interest
| Term | Definition | Example |
|---|---|---|
| Principal | Original borrowed amount | ₹1,00,000 |
| Interest | Extra money paid to lender | ₹10,000 |
Key Point: Knowing your principal helps in EMI calculation and planning your loan efficiently.
How Principal Amount Affects Your Loan
- Higher Principal → Higher EMI
- Longer Tenure → More Interest
- Shorter Tenure → Less Total Interest
Example Calculation:
- Principal: ₹1,00,000
- Interest Rate: 10% per year
- Loan Tenure: 1 year
- EMI = ₹8,791 (approx)
Tip: Paying part of the principal early reduces interest and shortens your loan tenure.
Tips to Reduce Principal Amount Faster
Borrow Only What You Need → Lower principal, easier repayment
Prepay Part of Your Loan → Reduces total interest
Choose Shorter Loan Tenure → Less interest accumulation
