Principal

Definition

Principal is the amount borrowed (or invested) before interest. For loans, interest is calculated on the outstanding principal balance.

Formula

Interest = principal x rate x time

Example

If principal is $10,000 at 6% annual interest, first-year interest is about $600.

How to use it

• Principal declines as you repay a loan; interest is charged on the balance.
• Extra payments reduce principal and total interest over time.
• For investments, principal is the initial amount you contribute.
• Principal is different from total cost over the life of a loan.

Common mistakes

• Confusing principal with total amount repaid (principal + interest).
• Ignoring how principal changes in an amortization schedule.
• Using original principal when interest should be based on current balance.

Why this matters

This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.

Practical checklist

• Write a 1-line definition for "Principal" that your team will use consistently.
• Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
• Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
• Use a calculator that references this term (e.g., Loan Payment Calculator) to sanity-check assumptions.
• Read the related guide (e.g., Loan amortization: how monthly payments and total interest work) for context and common pitfalls.

Where to use this on MetricKit