What does the term "principal" refer to in loans?

The term "principal" in the context of loans specifically refers to the original sum borrowed or invested. It is the amount of money that the borrower receives from the lender, which must be repaid over time, typically with interest. Understanding this concept is fundamental in finance, as it distinguishes between the initial loan amount and the additional costs that accrue over the life of the loan, such as interest. When you consider a loan, the principal serves as the base amount upon which interest is calculated, making it essential for borrowers to grasp its significance in their repayment terms and schedules.