Personal Loans

What Is Loan Principal? Learn How It Impacts Total Borrowing Costs

Written by Shannon Willoby
Freelance Writer and Editor
Published on: July 18, 2026 | 6 min read
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In a personal loan, principal is the original sum loaned to you (or the remaining balance after payments), not including interest or fees. Because interest is calculated on your outstanding principal, it's ultimately what determines the total cost of your loan.

Whether you’re consolidating six-figure debt or freeing up capital, understanding this figure helps you make smarter decisions about how you borrow, repay, and plan.

In this guide, we’ll explain what loan principal is, how it affects your monthly payment and total interest, and how to pay it down faster.

What is loan principal?

Loan principal is the amount you borrow, and the portion of that amount you still owe over time, excluding interest and fees. Everything else about your loan—your monthly payment, total interest, and payoff timeline—is determined by that number.

There are two types of principal when it comes to loans:

  • Initial principal: The original amount funded at the start of your loan
  • Outstanding principal: What remains after your payments have reduced the balance over time

Interest is calculated on your outstanding principal, which accrues daily or periodically based on your rate and terms. Paying it down faster reduces your total borrowing cost because less interest accrues each month.

For example, say you took out a $50,000 personal loan to pay for your child’s college tuition or a home renovation. After making payments, your balance is $42,000. This means your initial principal was $50,000, and your outstanding principal is $42,000.

One thing to note: If your lender deducts an origination fee at funding, the amount deposited to your account may be slightly less than your stated principal. Your loan disclosures will show exactly how this is calculated.

How loan principal impacts a personal loan

Your principal influences your required monthly payment and the total interest you’ll pay over the life of the loan. The monthly payment is set based on your initial principal, rate, and term, while the interest portion of each payment is recalculated against your outstanding principal.

For example, a larger principal means more interest accrues over time and results in a higher monthly payment. A smaller principal costs less overall and is faster to pay off.

Here's how that plays out across different loan amounts, using a fixed five-year term and 10% APR:

Principal

Monthly payment

Total interest

Loan term

$20,000

$425

$5,496

5 years

$40,000

$850

$10,992

5 years

Image is a representative example for illustrative purposes only and does not reflect actual customer information.

How loan principal differs from loan interest and fees

Principal, interest, and fees are three separate things, but they're easy to conflate when you're looking at a loan statement or comparing offers.

Here's how each one works:

What it is

How it affects your balance

Principal

The original amount borrowed (or what remains of it)

Decreases as you make payments

Interest

The cost of borrowing, calculated as a percentage of your outstanding principal

Accrues each payment cycle; each payment covers the interest due for that period, with the remainder reducing the principal balance

Fees

One-time or recurring charges (e.g., origination, late, processing)

May be deducted upfront or added to your balance at funding

 

Understanding the difference between these concepts is important for comparing loan offers. Two loans with the same principal and interest rate can have significantly different total costs if one carries origination fees, and the other doesn't.

Always review the APR (which includes both interest and fees) alongside the stated interest rate to get an accurate picture of what you'll pay.

 

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† This is not a guaranteed offer of credit and is subject to credit approval.

How does amortization work with loan principal?

Most personal loans are amortized, meaning each monthly payment is split between interest and principal. Early in the loan, a larger share goes toward interest. Over time, that balance shifts—more of each payment goes toward reducing principal, and less goes toward interest.

Here's how that plays out on a $20,000 loan at 10% APR over five years (60 months):

 

Month

Payment

Interest

Principal

Remaining balance

1

$425

$167

$258

$19,742

2

$425

$165

$260

$19,482

3

$425

$162

$263

$19,219

60

$425

~$4

~$421

$0

Image is a representative example for illustrative purposes only and does not reflect actual customer information.

 

Notice how the interest portion shrinks with each payment as the principal falls. By the final payment, almost the entire amount goes toward principal.

This is why making extra payments early in the loan term has the biggest impact—it reduces the balance on which future interest is calculated.

How to pay off your loan principal

When you pay more than the required amount, the excess—after covering any accrued interest—goes directly to principal. Targeted prepayments shrink your balance faster and reduce total interest over the life of the loan.

Follow this five-step approach to reduce your total interest and pay off your loan ahead of schedule:

  1. Review your loan disclosures: Confirm your original principal, APR, payment schedule, and any fees, so you know exactly what your balance includes from the start.
  2. Run the numbers on extra payments: Use a loan payoff calculator to see how one-time or recurring additional payments affect your total interest and payoff date. Even small amounts can make a meaningful difference over time.
  3. Apply extra payments directly to principal: When you pay more than the minimum, tell your lender explicitly to apply the excess to principal. Check your statement afterward to confirm it was applied correctly.
  4. Set up autopay: Whether you want to pay off your loan early or stick to the predetermined schedule, automating your monthly payment removes the risk of missed due dates that could impact your credit score.
  5. Consider refinancing or consolidating: If rates have dropped or your credit profile has improved since you originally borrowed, refinancing at a lower rate can reduce both your monthly payment and total interest paid.

Get a personal loan with a large principal from BHG Financial

If you’re a high-earning professional seeking a large personal loan, BHG Financial offers options designed for larger principals, paired with personalized underwriting and flexible, fixed-rate terms. 

Loan amounts go up to $250,0001, and repayment terms up to 10 years,1,2 so you can borrow what you actually need and structure payments around your cash flow. And because the loans are unsecured, you don’t need to use home equity or supply collateral to secure the funds.

Ready to see what’s possible? Explore your personal loan options in seconds without affecting your credit score.3

From there, a dedicated U.S.-based loan specialist helps you fine-tune the principal amount, payment, and payoff plan that fit your needs.

 

See your offer † real fast

Just a few easy steps to get prequalified!

 
† This is not a guaranteed offer of credit and is subject to credit approval.

Frequently asked questions

 

Is it better to pay the principal or interest?

You don't choose between the two—every scheduled payment covers both. But if you make extra payments beyond your monthly minimum, applying them directly to principal is the more cost-effective move. Reducing your principal lowers the balance on which future interest is calculated, which means less interest accrues over the remaining life of your loan.

 

What is loan principal balance?

Your principal balance is the amount you still owe on the original sum you borrowed, not including interest or fees. It decreases with each payment you make. For example, if you borrowed $50,000 and have paid it down to $38,000, your principal balance is $38,000.

 

How do amortization schedules allocate principal payments?

An amortization schedule shows how each monthly payment is split between interest and principal over the life of your loan. Early payments go mostly toward interest since your balance is at its highest. As your principal falls, less interest accrues each month, and more of each payment goes toward reducing the balance. By the final payments, almost the entire amount goes directly to principal.

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See your offer † real fast

Just a few easy steps to get prequalified!

 
† This is not a guaranteed offer of credit and is subject to credit approval.

Not all solutions, loan amounts, rates or terms are available in all states.

1 Terms subject to credit approval upon completion of an application. Loan sizes, interest rates, and loan terms vary based on the applicant's credit profile. Not all applicants will qualify for the lowest rate.



2 Personal Loan Repayment Example: A $60,000 personal loan with a 7-year term and an APR of 17.06% would require 84 monthly payments of $1,191.38.

Consumer loans funded by Pinnacle Bank, a Tennessee bank, or County Bank. Equal Housing Lenders. Equal Housing Lenders icon

3 There is no impact on your credit for applying. For personal loans, a complete credit history, which will appear as an inquiry on your credit report, will be performed upon acceptance and funding of the loan and may impact your credit.

No application fees, commitment, or impact on personal credit to estimate your payment.

For California Residents: Personal loans made or arranged pursuant to a California Financing Law license - Number 603G493.

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To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify and record information that identifies every customer. What this means for you: When you apply for a loan, we will ask for your name, address, date of birth, social security number and other information that will allow us to identify you. We may also ask to see your driver's license or other identifying documents. If all required documentation is not provided, we may be unable to establish a customer relationship with you.