What does "principal" refer to in the context of a loan?

In the context of a loan, "principal" refers to the original sum of money borrowed, excluding interest. When a borrower takes out a loan, the principal is the amount they receive upfront from the lender, which they are obligated to pay back over time. Understanding principal is essential for borrowers as it forms the foundation of loan agreements, impacting the calculation of interest and the overall repayment structure.

For instance, if someone borrows $10,000 at a specified interest rate, that $10,000 is the principal. As the borrower makes payments, they pay back this amount along with interest calculated on the outstanding principal. Recognizing this distinction helps borrowers understand the true cost of borrowing and how much they need to repay beyond just the principal amount.