Definition
The core amount borrowed or invested, as opposed to the interest it generates. Extra debt payments should be applied to principal, which shrinks all future interest.
Why it matters
Interest is calculated on principal, so principal is the only number worth attacking. An extra payment marked for principal shortens the whole loan; one absorbed as a future payment does almost nothing.
Example
Adding $200 a month marked apply to principal on a $300,000, 6.5% mortgage pays the loan off years early and saves six figures of interest, because every reduced dollar of principal stops accruing for decades.
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.