In financial terms, what does 'principal' refer to?

The term 'principal' in financial contexts specifically refers to the initial sum of money that is either loaned to a borrower or invested in a financial venture. This is the core amount that does not include any interest or additional earnings derived from the investment. When someone discusses principal, they are focusing on the base amount that forms the foundation for further calculations, such as interest accrued or returns on an investment.

In contrast, interest earned on a loan represents the cost of borrowing and adds to the total amount that must be repaid over time, but it is not considered part of the principal. Similarly, the total loan amount after repayments would factor in how much of the principal remains following payments made, rather than defining what the principal originally was. The annual percentage rate pertains to the cost of borrowing expressed as a percentage, but again, it does not relate directly to the amount of money being referred to as the principal. Understanding these distinctions is crucial for grasping fundamental financial concepts.