What is Principal?
Principal is the original amount of money borrowed from a lender, before any interest is added. In a loan, the total repayment = principal + interest. With each EMI payment, a portion goes toward reducing the outstanding principal (called principal repayment) and the rest covers the interest for that period. The outstanding principal decreases each month until it reaches zero at the end of the tenure.
Example
You borrow ₹20 Lakh (principal) at 9% p.a. for 20 years. Monthly EMI = ₹17,995. In month 1: ₹15,000 goes to interest (₹20L × 0.75%) and ₹2,995 reduces the principal. By year 5, outstanding principal ≈ ₹17.7 Lakh.
Frequently Asked Questions
What is the difference between principal and interest in a loan?
Principal is the actual amount borrowed. Interest is the fee paid for borrowing that money, calculated as a percentage of the outstanding principal. Your total loan cost = principal + total interest paid over the tenure. Example: ₹10 Lakh borrowed at 10% for 10 years — you repay ₹15.8 Lakh total. Principal = ₹10 Lakh, total interest = ₹5.8 Lakh.
How does principal reduce with each EMI?
In a reducing balance loan, each EMI first covers the interest for that month, then the remainder reduces the principal. Early EMIs are mostly interest (small principal reduction). Later EMIs are mostly principal repayment (less interest, since outstanding is lower). This is why foreclosing a loan in the first few years saves the most interest.
Related Terms
Ready to Apply?
Personal Loan starting at competitive rates · Approval in 5 working days