What is Principal Amount

The term ‘Principal Amount’ isn’t new, we have been employing it since childhood. It used to be in the ‘Simple Interest’ and ‘Compound Interest’ calculations; now, the term is used repeatedly in banking practices, mostly in savings accounts and loans.

This piece pertains to the principal amount meaning the formula to find the principal amount and its amortisation amount.

What is Meant by the Principal Amount?

The definition of the principal amount changes based on its application. The principal amount is often used to define the original sum of money put into an investment and borrowed in a loan. The term also refers to the face value of a bond or security. 

What is the Formula for Finding the Principal Amount?

To calculate the principal amount on loan availed of, you can use the principal amount formula given below: 

P = I/rt 

Where 

P = Principal 

I = Interest Amount

r = Interest Rate

T = Time

Example of Principal Amount

We have described two examples of the principal amount below so that you can comprehend the concept well. 

Suppose you deposit ₹ 70,000 in your interest-bearing savings account. After seven years, it becomes 75,000. The initial invested amount, i.e. ₹ 70,000, will be your principal amount, and the remaining ₹ 5,000 is the interest earned. 

Now, you might be wondering – what is the principal amount of a loan?

In the case of loans, the principal amount refers to the actual amount you borrowed from the lender and the remaining amount after you have repaid a part of it.

Let us consider an example. Suppose you borrowed a home loan of ₹ 25 lakh, and you have already paid ₹ 10 lakh. The principal amount, in the beginning, was ₹ 25 lakh. However, now it is ₹ 15 lakh, as you have paid the rest. 

Principal Amount Amortisation

When borrowers take loans, they usually make monthly payments to the lender. This is the most common use of amortisation. A fraction of the payment consists of the interest on the loan, while the remaining payment reduces the principal amount owed.

On the other hand, the interest is calculated on the current amount owed. Therefore, it becomes progressively smaller as the principal decreases. You can look at the same on the principal amount amortisation table below.

Here, we have considered a total loan amount (principal amount) of ₹ 20,000 for a tenure of 10 years. The interest on the loan is 6%. 

Conclusion

The definition of principal amount varies for different situations. As mentioned above, the principal amount is the actual money put into an investment and borrowed in a loan. Hence, the formulas for calculating the same are also different.