In personal finance, the amount originally borrowed in a loan, excluding interest, is called the principal.
A borrower's scheduled payment may contain principal, interest, and sometimes taxes, insurance, or fees. The principal portion reduces the outstanding balance. Interest compensates the lender for providing funds and taking risk.
As the principal falls, interest charges may decline on loans that calculate interest from the remaining balance. In a standard amortizing loan, payment schedules show how each installment is divided between principal and interest.
Principal can also mean the original amount invested. In that setting, returns are measured relative to the principal, while the investment's market value may rise or fall independently.