By Melissa Cook Reviewed by Minh Tong Updated Mar 10, 2023

In financial terms, the principal refers to the initial amount of money that is borrowed or invested, upon which interest is calculated or earned. 

It is the original amount of money involved in a financial transaction, such as a loan or investment, and it represents the basis for all subsequent financial activity.

In the context of loans, the principal is the amount borrowed from a lender, which is then repaid with interest over a specified period of time. 

For example, if you take out a $10,000 loan, the principal amount is $10,000. The interest that you pay on the loan is calculated based on the principal amount, so the higher the principal, the more interest you will have to pay.

Similarly, in investments, the principal is the amount of money that is initially invested by an individual or a company. The return on the investment, which may be in the form of interest, dividends, or capital gains, is calculated based on the principal amount. 

For example, if you invest $10,000 in a stock that returns a 5% dividend, the dividend amount will be calculated based on the principal amount of $10,000.

The principal amount is an important factor to consider when making financial decisions because it determines the amount of interest or returns that will be earned or paid. It also affects the total cost of borrowing, as higher principal amounts typically result in higher interest charges. 

Therefore, it is essential to carefully evaluate the principal amount when making financial decisions and to ensure that it aligns with your overall financial goals and objectives.


Melissa Cook

Melissa has a degree in English and marketing from University of California Irvine. She is a creative and accomplished content writer and editor with comprehensive experience developing rich, compelling content for a variety of websites. With her expertise in writing a broad range of content, combined with outstanding interpersonal skills and commitment to exploring innovative ideas, Melissa has done an excellent job developing content for blogs, articles, social media, and the company website. When she is not writing, Melissa spends most of her time cooking, traveling the world, and catching her favorite Broadway shows.