Principal

What Is a Principal?

A loan’s principal is the amount of money that a borrower borrows from a lender. For instance, on a $200,000 loan, the principal is $200,000. The principal is also used to determine interest payments. For instance, a borrower with a $200,000 loan and 10% interest rate must may 10% of $200,000 in interest each month.

How Does a Principal Relate to Hard Money Loans?

In hard money lending, the principal is central to the loan. Hard money lenders determine the principal of each loan using the value of the property used to secure each loan. At Source Capital, we offer up to 65% LTV on hard money loans. That means a borrower’s loan principal can be up to 65% of the value of their collateral property.

How a Principal Works

To calculate a principal, you’ll need to know two different figures: the value of the collateral property and the lender’s maximum LTV. Use this equation to determine principal:

Loan Principal = Property Value * LTV

For example, let’s calculate the loan principal using a $1 million property as collateral and a 65% LTV:

Loan Principal – $1 million * 0.65
In this case, the loan’s principal would be $650,000.

Principal FAQs

How does a loan principal differ from interest?

The loan principal is the amount a borrower borrows for their own purposes, for instance to invest in a new property, renovate an existing property, and more. The borrower can use these funds to complete their intended project and must pay them back.

The interest, on the other hand, is the lender’s fee for lending the money. Lenders charge a small percentage of the principal in return for loaning the money. Interest payments are due each month throughout the duration of the loan.

How is the principal repaid on a loan?

Hard money loans can be repaid in different ways according to their loan structure. They may have:

Regular payments: For standard loans, a portion of the principal is paid back each month, along with interest payments.
Balloon payment: Hard money loans are often structured with interest-only payments throughout the duration of the loan, and a balloon payment of the loan principal once the loan reaches maturation.

Is the principal the same as the loan balance?

The principal makes up the largest portion of the loan balance, but the two are not interchangeable. The loan balance includes the principal along with interest and loan fees. This is the total cost of your loan over its lifetime.

Does paying down the principal faster save me money in the long run?

It depends. In some cases, lenders will charge a penalty to borrowers who pay off their loan early, known as a pre-payment penalty. This penalty is designed to cover the cost of the interest that the loan would have accrued throughout the remainder of its lifetime. Even with this fee, some may find that paying off their principal faster saves them money in the long run.

Source Capital never charges pre-payment penalties. Borrowers are free to pay off their loans early without paying an extra fee.

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Principal

What Is a Principal?

How Does a Principal Relate to Hard Money Loans?

How a Principal Works

Principal FAQs

Related Terms