## What is a Principal Payment?

A principal payment is a payment toward the original amount of a loan that is owed. In other words, a principal payment is a payment made on a loanBullet LoanA bullet loan is a type of loan in which the principal that is borrowed is paid baông chồng at the over of the loan term. In some cases, the interest expense is that reduces the remaining loan amount due, rather than applying lớn the payment of interest charged on the loan. In accountingFinancial Accounting TheoryFinancial Accounting Theory explains the why behind accounting - the reasons why transactions are reported in certain ways. This guide will and finance, a principal payment applies to any payment that reduces the amount due on a loan.Bạn vẫn xem: Principal payment là gì

Bond Principals are further analyzed on CFI’sFixed Income Fundamentals Course.

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### The Basics of a Loan

Understanding the components of a loan is very important. Every loan comprises two components – the principal and the interestInterest ExpenseInterest expense arises out of a company that finances through debt or capital leases. Interest is found in the income statement, but can also. The principal is the amount borrowed, while the interest is the fee paid to borrow the money.

Consider an individual who saved $400,000 khổng lồ pay for a $1,000,000 home page. They would need khổng lồ borrow $600,000 from the bank lớn complete the transaction. The $600,000 is the principal amount – the money borrowed. A ngân hàng may require 5% annual interest on the principal amount – the fee paid lớn borrow the money.

The individual in the situation above would need lớn make an annual total payment that consists of both principal và interest payments. The principal payment goes khổng lồ reducing the outstanding principal amount due, while the interest payment goes to paying the fee khổng lồ borrow the money.

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There are generally two types of loan repayment schedulesDebt ScheduleA debt schedule lays out all of the debt a business has in a schedule based on its maturity and interest rate. In financial modeling, interest expense flows:

Even principal paymentsEven total payments### Even Principal Payments

In an even principal payment loan, the principal payment amount is the same every period. Consider John, who takes a $10,000 loan with a 10% annual interest over 10 annual payments. The loan repayment schedule would look as follows:

The principal payment each year goes to reducing the unpaid balance. Since this amount each year is $1,000, the unpaid balance is reduced by $1,000 yearly. The interest payment is calculated on the unpaid balance. For example, the end of year one interest payment would be $10,000 x 10% = $1,000. lưu ý that while the payment of principal remains the same, the total payment due each year, including interest, changes.

### Even Total Payments

In an even total payment loan, the total payment amount is the same every period. Consider John, who takes a $10,000 loan with a 10% annual interest over 10 annual payments. The loan repayment schedule would look as follows:

In the loan repayment schedule above, the loan amortizes over 10 years with even total payments of $1,627.45. In 10 years, the unpaid balance is $0.

As opposed to an even principal payment schedule, the amount paid khổng lồ principal here increases yearly. This is due to lớn much of the initial total payment going toward paying interest rather than principal. In the first year, the amount of interest would be $10,000 x 10% = $1,000. With a total payment of $1627.45, the unpaid principal balance is only reduced by $1627.45 – $1,000 = $627.45. In such a schedule, interest payments decrease and payments on the principal increase over time.

### Even Principal Payments vs. Even Total Payments

A higher principal payment on a loan reduces the amount of interest owed &, in turn, reduces the total amount paid over the life of the loan. Therefore, principal payments play a significant role in the amount an individual must pay over the lifetime of a loan.

### Related Readings

certification program for those looking to lớn take their careers to lớn the next màn chơi. To keep learning & advancing your career, the following CFI resources will be helpful: