Finance: What is principal?

What is principal? A principal is an entity of record in a transaction with authorization for one side of a transaction, whether it be as buyer, seller, or service provider. Principal can also refer to the face amount of a loan or debt instrument, which is the amount to be repaid apart from interest.

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Transcript

00:26

that kicks you the wrong way but you owe it you owe that principal to the lender

00:32

who loaned it to you and you want to put it on a diet as fast as you can

00:37

why well because when that principal shrinks the rent you owe on it shrinks

00:41

as well all right here's some simple math you borrow 40 grand by a

00:45

three-year-old ludicrous mode enabled Tesla with a few minor dents and you [Man driving a supercar]

00:51

know you got a few shards of deer antlers stuck in the grille there for

00:54

free you are considered a risky bet by the lenders loaning you your money or

00:58

principle partly because of the way you drive so the rent on that principle 12%

01:03

a year or 1% a month big interest rates because well you're such a crappy driver

01:08

so on 40 grand of principal the cost to rent that money is 400 bucks a month or

01:12

$4,800 a year that is just to stay even on the principle you've borrowed you [Principal interest payment chart appears]

01:18

have to pay $400 every month and that's just the interest if you paid 30 40 50

01:23

60 months of 400 bucks a month well you would still owe that principal of 40

01:29

grand because all you did was baby interest or rent on it

01:31

ouch but what if he went six months paying a full thousand dollars a month

01:35

yes much would go from not eating or something like that well what would [Guy driving blue tesla]

01:39

happen think about that first month you've quote overpaid unquote by 600

01:44

bucks so if your loan resets or recalibrates every month well then you

01:48

get to put your principal at least a little bit on a diet so after that first [Principal constricted by tape measure]

01:53

month of paying a grand your 40 grand in debt goes down to thirty nine thousand

01:59

four hundred dollars pay a thousand bucks another month and while you're

02:01

still paying twelve percent a year or one percent a month to rent that money

02:05

only now that monthly rent was reset at one percent of thirty nine thousand four

02:11

hundred or 394 bucks right six dollars cheaper

02:14

than the 400 you started with but you paid a grand so now you get to use 606

02:20

dollars to pay down the principal and see the math there the new principal

02:23

thirty nine thousand four hundred minus at six hundred six it's now thirty eight

02:27

thousand seven hundred ninety four dollars that you owe do a grand another

02:30

month and you get to pay down even more of the principal about three hundred

02:34

eighty eight bucks is attributable to interest but you paid a grand so that's

02:38

a thousand minus the three eighty eight there so then that goes to principal pay

02:42

down or $612 a principal pay down alright you're getting the gist here as

02:46

you paid down the principal you get to attribute more and more of that made-up [Clock ticks as money stacks land]

02:51

thousand dollars a month payment so check out what happens when you just

02:55

keep going and as we look a couple of years into the future just look at how

02:58

little interest there is now here relative to what there was when we

03:03

started so yeah it's totally worthwhile to pay

03:05

more than minimum payments when you can and you know really as much as you can

03:09

manage that way when your bank statement for what you owe arrives in the mail you [Bank statement appears through letter box]

03:14

you know don't feel like a dear