Loans & debt
Principal and interest: Definition, Formula and Example
Principal is the outstanding amount borrowed; interest is the charge for using that money over time.
Scope: General financial concept; examples are hypothetical.
Other names and related labels: Loan principal; P&I payment.
How it works
A payment may cover fees and accrued interest before reducing principal. On a standard amortizing loan, the interest portion changes as the balance changes. Mortgage escrow, insurance and taxes may increase the total payment without reducing the loan balance.
For one regular period: interest = opening principal × periodic rate; principal repaid = payment − interest
This simple split excludes fees, arrears and contract-specific allocation rules. Daily-interest contracts also depend on elapsed days.
Splitting a $1,000 payment
Start with $12,000 outstanding at 6% nominal annual interest with monthly periods.
- Monthly interest: $12,000 × 0.06/12 = $60.
- Principal repaid: $1,000 − $60 = $940.
- Closing principal: $12,000 − $940 = $11,060.
Of this payment, $940 reduces principal and $60 pays interest.
One regular month; no fees, escrow, new borrowing or prior unpaid interest.
The worked example uses the assumptions above. Related tools may model a different scope; check their descriptions before comparing results.
Paying $1,000 does not mean the debt falls by $1,000
Only the principal portion reduces the balance. Extra payments can change future interest if applied to principal, but prepayment terms and payment allocation should be checked in the contract.
Explore with a calculator
- Payment Calculator
Calculate a payment or loan amount with stated timing.
- Repayment Calculator
Inspect how payments reduce an outstanding balance.
- Loan Calculator
Review a modeled principal-and-interest schedule.
- Auto Loan Calculator
Separate the financed vehicle amount and financing cost.
- Boat Loan Calculator
Inspect financed principal, payments and interest.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
Calculation methodology and review status · All glossary terms