Principal financial means different things to different people and different field but under the field of finance, principal means the money which was borrowed from a lender and put into investment or used in financing the corporation.
It is usually referring to as the bond face value. Principal under finance can also be referred to as the private company or transaction chief owner and participant respectively.
Principal finance breakdown
Principal financial can is the original money or can be said to be the initial or actual money which was borrowed. For example, a sum of money like $25,000 can be borrowed with an interest rate of 2%. The $25,000 is the principal and if $15,000 is paid out of the money which was borrowed remaining, $10,000, the $10,000 is still the principal.
Basically and financially, the principal decides the interest rate on it and the mortgage payment to be made. Following the example stated above, the interest rate is 2% which means on the capital, annually, the interest to be paid is $500 and this would be paid the longer the loan gets. Mostly most lenders use the payment made by the borrower monthly to cover up the interest charge first and the remaining money paid is used in the covering up of the capital and this is so because the lender would want to collect another interest charge the following year should the borrower default on the loan given to him.
Making a good down payment actually reduce the interest rate charged on the principal. For example, the example stated above can have its interest rate reduced to 1% if the borrower is able to make a down payment of $5,000 which means the principal now is $20,000 leaving the borrower to pay $200 interest at the end of the year.
READ: Financial management
There are some principal financial to be discussed;
- Original investment. Separate from the interest charged or the earnings, principal is used as the amount originally used for an investment. For example, a deposit of $25,000 was made to a savings account that bears or yield interest but at the end of the year which is usually the actual time for interest yielding, the account balance is now $25,200. In this example, the extra $200 on the money is the earning while the $25,000 is the principal.
- Zero principal mortgage. This can also be called interest only mortgage which is not very popular. The zero principal mortgage has the borrower regular payment which can be monthly or weekly to cover the interest rate on the loan which was charged and consequently, the borrower will not be able to pay off the debt which is the principal. He keeps on paying the interest on the capital and this makes the home buyers not putting it in their agenda. Although, there are some situations in which it will be useful for a borrower especially a borrower that just start earning but with little pay and has a great assurance of having a large pay in the future, can take this type of financing and buy a residence for himself or herself. But home buyers that are not sure of having more than their usual payment get things muddled up for himself if he tries this type of financing as he will not be able to reduce the overall debt. It is also useful for a borrower that has an investment that is sure of having great returns at the end of the day or year. An individual sure of having great returns from an investment can use the available money with him for investment and take zero principal mortgage. For example, an individual with $25,000 at hand can take a zero principal mortgage with $10,000 which he is supposed to pay $25,000 and then use $15,000 as investment that will yield $40,000. He uses the $15,000 to pay back the debt and still has $40,000 as a profit.
READ: Ministry of finance
- Bond face value. Principal can be referred as bond face value in debt instruments. This means the original money which the bond was listed on. The principal bond represents the amount of money owed to bondholders by the issuer of a bond in debt financing.