What is principal
Principal is the original amount of money that is invested, deposited or borrowed, before any interest, profit or fees are added.
When you borrow, the principal is what you owe the lender apart from interest. When you invest or deposit, the principal is the money you put in, separate from any return it earns.
Ready to try it on a real or demo account?
Partner link · trading carries a high risk of loss
Principal vs interest
| Principal | Interest | |
|---|---|---|
| What it is | The base amount lent, borrowed or invested | The price paid for using that money over time |
| How it changes | Falls as a loan is repaid. For a deposit it stays the same unless interest is added to it | Calculated on the outstanding principal at the agreed rate |
| Who receives it | Returned to the lender or the investor | Earned by the lender or the investor |
Worked example (hypothetical)
Suppose you borrow an amount P from a bank at a fixed annual rate, repaid in equal monthly instalments. This kind of schedule is called amortization.
- Each instalment has an interest part and a principal part.
- The interest part is the rate applied to the principal still outstanding.
- Early in the loan, the outstanding principal is large, so most of each instalment is interest.
- Later, the outstanding principal is smaller, so more of each instalment reduces the principal.
- When the outstanding principal reaches zero, the loan is repaid.
To try this with real amounts, use the tools on the calculators page.
Where you see the term
- Loan and financing statements: "outstanding principal", "principal repaid" and "principal balance" lines on an account statement.
- Bonds: the principal is the face value repaid at maturity. The coupon is the interest paid on it.
- News: reports on government debt separate "principal repayments" from "interest payments". Policy-rate decisions affect the interest charged on principal. An example is SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC).
- Trading accounts: traders often call their deposited capital their principal. In leveraged forex and CFD trading, losses come out of that money, and they can use it up quickly. See risk management.
Precise definition and edge cases
- Formal definition: the principal is the outstanding amount of a debt or investment on which interest or return is calculated. It excludes accrued interest, fees and penalties.
- Capitalised interest: when unpaid interest is added to the balance, the principal grows. This is how compounding works on deposits. It is also how negative amortization works on some loans.
- Bullet repayment: some bonds and loans repay the whole principal at maturity and only interest before that.
- Principal at risk: "principal-protected" products aim to return the original amount. "Principal at risk" means you can get back less than you put in, for example after a default.
- Principal as a role: in dealing, acting "as principal" means trading on your own account, as a dealer or counterparty does. Acting "as agent" means acting on behalf of a client.
- Islamic finance: contracts avoid interest on principal and use other structures. See Islamic finance.
Related terms
Basis point, annualized return, CAGR, collateral, exposure, bond duration. For more terms, see the trading glossary and saving, investing and loans.
Frequent questions
What is the principal amount of a loan?
It is the sum you borrowed, or the part of it you still owe, without interest and fees.
What does principal mean in investing?
It is the money you originally put in, separate from gains or losses on it.
Does paying more each month reduce the principal?
Usually the extra amount goes to principal, which lowers future interest. Check your loan terms, because some lenders apply extra payments differently or charge for early repayment.
Can I lose my principal?
Yes, with any investment that is not guaranteed. In leveraged trading the losses can exceed what you expected, and they can happen fast.