What is the difference between "principal" and "interest" in a loan context?

In a loan context, understanding the distinction between principal and interest is fundamental to grasping how loans work. The principal refers specifically to the actual amount of money that is borrowed from a lender. This is the original loan amount that the borrower receives and is obligated to repay.

Interest, on the other hand, represents the cost associated with borrowing that money. It is typically expressed as a percentage of the principal and is the fee that the lender charges for the use of their money over a specified period. As the borrower makes payments, they are repaying both the principal and the interest until the loan is fully paid off.

Recognizing this difference is crucial for anyone involved in real estate transactions or financing, as it affects the total cost of a loan over time and influences decisions regarding loan types and payment strategies.