Principal repayment - Financial definition
Concise definition of the term principal repayment
Principal repayment refers to the payment made to reduce the original amount of a loan or debt, excluding interest. It is the repayment of the borrowed capital over the loan term.
Comprehensive definition of the term principal repayment
Principal repayment is a crucial aspect of loan agreements, as it directly affects the total interest paid over the life of the loan. In various types of loans, such as mortgages, personal loans, and business loans, the borrower is required to make regular payments that include both principal and interest. For example, in an amortizing loan, each payment gradually reduces the principal, resulting in lower interest charges over time.
Principal repayments can also occur in lump sums, such as when a borrower decides to pay off the entire remaining balance of a loan early. Market practices often encourage principal repayment strategies to minimize overall debt costs and improve financial health.