Principal Payment
What Is a Principal Payment?
A principal payment is the portion of your loan payment that reduces the original amount you borrowed.
It does not include interest or fees.
The more principal you pay, the less interest you pay over time.
Why Principal Payments Matter
Because interest is calculated on your remaining principal, extra principal payments can:
- Shorten your loan term
- Reduce total interest
- Build equity faster (for mortgages)
Even small additional payments can make a meaningful difference over time.
Example
If you owe $20,000 at 7% interest and add an extra $100 per month toward principal:
- You reduce total interest paid
- You shorten the payoff timeline
Always specify that extra payments apply to principal.
FAQs About Principal Payments
Are extra principal payments allowed?
Usually yes, but check for prepayment penalties.
How do I ensure extra payments go toward principal?
Clearly indicate “principal only” when making payment.
Do principal payments affect credit score?
Indirectly, as balances decrease.
Related Terms
