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Finance: What is principal? 707 Views
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Description:
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
- 00:00
finance a la shmoop what is principle answer its the loan amount you borrow
- 00:08
when you do you sign a bunch of papers promising to pay back the principal and [Person signs paper]
- 00:12
the interest that goes with it and that interest is like rent you have to rent
- 00:17
that money you swear up and down you'll pay back the principal that princess is
- 00:21
not necessarily your pal it might be a monkey on your back it might be a mule [Mule kicking a man]
Full 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
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