Principal

Meaning and Definition

Principal refers to the initial amount of money borrowed or financed in a loan agreement. In car finance, it represents the original loan amount, excluding any interest charges, fees, or additional costs.

Why it is important to know

Understanding the principal is essential for borrowers as it represents the amount of money they are borrowing or financing to purchase a vehicle. The principal amount, along with the interest rate and loan term, determines the total cost of the loan and the monthly instalments. Borrowers should carefully consider the principal amount to ensure it aligns with their budget and repayment ability. Additionally, knowing the principal allows borrowers to calculate the total interest paid over the loan term and assess the overall cost of car finance.

Example

A borrower applies for car finance to purchase a vehicle priced at £15,000. If approved, the lender provides a loan with a principal amount of £15,000, which represents the borrowed sum. The borrower would then repay the loan over an agreed-upon term, typically with interest, through regular instalments until the principal and interest are fully paid off. The principal amount remains constant throughout the loan term, while the interest portion decreases as payments are made.