Definition: The amount of a loan upon which the interest rate is multiplied to determine your interest expense. It’s the amount you owe the lender before adding interest and fees.

Example: The principal amount is usually the amount you borrowed. If you borrowed $10,000 to buy equipment, the principal balance of the loan is $10,000.

Why It’s Important: The principal balance may be different than the amount of cash you receive. If you borrowed $50,000 to buy equipment and authorized the bank to finance a $500 origination fee, then your principal balance is $50,500 and you receive $50,000 to purchase the equipment.

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