Ethical Homes

In the context of loans, principal is the amount borrowed or still owed on the loan; in the context of real estate transactions in general, a principal is a direct participant in the transaction.

Loan Principal

When taking out a loan, a borrower receives a certain amount of money from the lender; in return, the borrower agrees to pay back that full amount to the lender, along with an extra amount for the right to borrow the money in the first place. The amount actually borrowed and to be paid back is the principal of the loan, while the extra amount paid to the lender is the interest on the loan.

With an installment loan, a portion of each payment that the borrower makes goes towards the accrued interest on the loan, with the remainder of the payment being credited against the principal owed. The amount of principal owed at the start of the loan is technically referred to as the original principal balance, while the amount of principal still owed at any given time during the life of the loan is technically referred to as the outstanding principal balance; in practice, however, both amounts are often called just “principal”, with context used to distinguish between the numbers.

Transaction Principal

In a real estate transaction, a principal is any of the direct participants in the transaction—that is, either the buyer or the seller—as opposed to others acting on behalf of those participants (e.g. agents, inspectors, lawyers). Outside of legal situations, this term is mostly encountered in the phrase “principals only”.