Also known as: Principal, Outstanding principal
Principal
The amount you actually borrowed and have to return. Interest is the price of borrowing it, and it is always calculated on whatever of the principal is still outstanding.
The principal is the debt itself: the amount you borrowed and have to return to the bank. Everything else you pay while repaying is the price of having been able to borrow it.
On a mortgage the principal and the interest are repaid together, in one instalment. That makes it easy to lose track of how much of the debt you have actually cleared.
Four numbers people confuse
Four different sums circulate around a loan, and each means something else:
The loan amount is what the bank approved and paid out. On our mortgage, €150,000.
The principal is the unpaid part of that debt. At the start it equals the loan amount, then it falls every month.
Interest is the price of borrowing. It is not part of the debt: it is an extra payment that does not reduce it.
The total paid is everything you send the bank over the whole term. On €150,000 at 4% over 30 years that is €257,804: some €107,804 more than you borrowed.
How it works
Interest is calculated on the principal outstanding, not on the original loan amount:
The rest of the instalment goes to the principal. And this is where the surprise usually is.
The first instalment up close
A mortgage of €150,000 at 4% over 30 years. The monthly instalment works out at €716.12.
In the first month the interest is calculated on €150,000:
€150,000 × 4% ÷ 12 = €500.00
That leaves only €216.12 for the principal.
You send the bank €716.12, but your debt falls from €150,000 to €149,783.88.
Why it matters
The instalment paid and the debt reduced are not the same number. Over the first year you send the bank €8,593, but the principal falls by only €2,642: the rest was interest.
That is exactly why, in the first years of a mortgage, the debt seems barely to move. It is neither a mistake nor a trick, just the consequence of interest being calculated on a high balance. As the principal falls, so does the interest, and an ever larger part of the same instalment goes to the debt. That gradual shift is called amortisation.
The principal is also the only number worth attacking. An overpayment goes entirely to it and because it lowers the base the interest is calculated on, you save in every future month too.
What to watch out for
A €716 instalment does not mean the debt fell by €716. This is the most common misunderstanding. Always look at the principal outstanding on the statement, not at what you sent.
A low instalment is not the same as a cheap loan. A longer term lowers the instalment, but you repay the principal more slowly and pay interest on a higher balance for longer. In total you pay more.
Try it yourself
The mortgage calculator shows the amortisation table, that is every instalment split into interest and principal. The early repayment calculator works out how much you save by cutting the principal with an overpayment.