A few basic terms – *loan principal*, *interest*, *and interest rate.*

The ** loan principal** is the amount of money a

*borrower*receives from a

*lender.*

** Interest** is the fee that the borrower pays to the lender, for the right to borrow the

*loan principal*.

The * interest rate* is the

*rate*at which

*interest*is paid to the

*lender*.

The ** interest rate** is usually expressed as a percentage of loan principal for a period of one year.

Alright – enough with the italics.

*Interest rates* are extremely important, but please take note – the amount of *interest* actually charged by a lender is based on a *percentage* of the outstanding *loan principal*.

In other words – if we reduce outstanding *loan principal* – we reduce the amount of *interest* we have to pay over the life of a loan.

When working to get out of debt, I always chose to –

**Make minimum payments to all lenders (creditors) – on time!**

**Make extra, principal-only payments, throughout each month, to a single, specific lender.**

Making *principal-only* payments reduces the *average daily balance* of a loan, an important factor in determining how much interest is charged, per period, by certain lenders.

Reducing the *principal* reduced the amount of *interest* that I paid, over the life of each individual loan, and all of my loans, collectively.

I made sure that any *principal-only* payments were processed as such, and were not simply treated as *prepayments* by my creditors.

In the case where *principal-only* payments are not accepted, I would simply make “payments” to an interest-bearing savings account, and pay the entire loan off early in one big payment.Â This assumes, of course, that the terms of the loan allow for this.

Reducing *interest rates* is awesome – and I’m all for doing so.Â However, I believe that it is extremely important to focus on the *loan principal* – the amount actually owed – and reduce it as quickly as possible.

Please take a second to share this post with others.Â Thank you!

## 1 thought on “Focus On The Loan Principal”

Comments are closed.