![]() Principal payment – Payment made on a loan that reduces the amount due, rather than a payment on your accumulated interest Interest payment – When making your monthly payment, the interest payment refers to the amount of money that goes toward paying the interest charges. For example, if your loan has an APR of 10 percent, you would pay $10 for every $100 you borrow annually. Lenders may charge you different interest rates based on your credit score.Īnnual Percentage Rate (APR) – When you are borrowing as a consumer, you may see the term APR, which refers to your interest rate for the entire year. When you borrow money, you often pay interest. Interest – Interest is the cost of using somebody else’s money. However, the lender usually specifies in the contract that they will charge an amount in exchange for borrowing money - this is called the interest. The principal is the original amount you borrowed and have to payback. When you apply for a credit account with a lending institution, you’ll usually be asked to sign a contract where you promise to pay back the borrowed amount. What is the difference between principal and interest? Below, we explain the difference between the two and apply these concepts to help you manage your personal finances. Two common terms often used in the world of banking and personal finance are principal and interest. ![]() When it comes to applying for credit, one of the challenges that people often face is understanding the long list of complicated terms and jargon.
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