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Principal is the amount of money a company borrows when it takes a loan. This amount is recorded on a promissory note as proof of the debt owed.

In all but the rarest of situations, the borrower must pay interest, which is the lender’s fee for making money available. The interest is calculated on the principal and almost always paid monthly.

More about principal

In the example below, ABC Co. borrowed $100,000 in principal and agreed to pay it back in 12 months with interest. The interest rate was 5%. The table shows how the amount of principal owing gets smaller with each payment. The timeline for payback is called the amortization period.

Example of a chart showing how the amount of principal owing gets smaller with each payment

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