Written By:
Paul Tracy
Updated September 30, 2020

What is Principal?

In finance,  principal refers to the face amount of a debt instrument or an amount of money borrowed.

How Does Principal Work?

For example, if you borrow $25,000 from XYZ Bank to purchase a car, the principal balance is $25,000. As time goes by and you make payments on the loan, the principal balance goes down.

For bonds, principal generally refers to the bond's face value or the par value. Thus, a bond with a $10,000 face value represents a $10,000 loan to the issuer (i.e., $10,000 of principal). It is usually equal to the amount the bondholder receives on the bond's maturity date.

Why Does Principal Matter?

Interest oThe definition of principal on InvestingAnswersn any loan, bond or not, typically accrues on the outstanding principal balance. That is, the lower the principal outstanding, the less total interest the lender earns.