Principal

Principal means slightly different things depending on context, but the core idea is the same: it is the base amount that interest acts on. When you borrow, the principal is the amount lent to you, and your remaining principal is the outstanding balance that still accrues interest. When you save or invest, the principal is the money you put in, before any returns.

On an amortizing loan, each monthly payment is split between interest on the current balance and a principal portion that reduces what you owe. Paying extra principal directly shrinks the balance, which lowers all future interest because interest is only ever charged on the principal that remains. Keeping principal and interest separate in your mind is the key to understanding how loans and compounding actually work.