Principal is the money you borrowed or deposited; interest is what the lender or bank charges you for using it
When you take out a loan, the principal is the original amount of money you received. When you open a savings account, the principal is the money you put in. Interest is the extra money you pay (on a loan) or earn (on savings). On a loan, interest is the cost of borrowing. On savings, interest is the payment the bank makes to you for letting them use your money.
The difference matters because your monthly payment on a loan covers both principal and interest, but they are not split equally. Early in the loan, most of your payment goes to interest. Later, more goes to principal. On savings, the interest you earn gets added to your principal, and then you earn interest on that larger amount — this is called compounding.
You can find these numbers on your loan statement, savings statement, or loan agreement. Your lender or bank is required to show you both figures. If you cannot find them, you can calculate them yourself using the information on your statement.
Key Takeaways
- Principal is the original amount borrowed or deposited; interest is the cost of borrowing or the payment for saving.
- On a loan statement, the principal balance decreases with each payment, while the interest portion starts high and shrinks over time.
- On a savings statement, interest earned is listed separately and gets added to your principal each month or quarter.
- You can calculate interest yourself by subtracting the original principal from the total amount owed or earned.
- Understanding the split between principal and interest helps you see how much you are actually paying for a loan or earning on savings.
Finding principal and interest on a loan statement
Your loan statement shows your current principal balance — the amount you still owe on the original loan. This number shrinks with each payment you make. The statement also shows how much of your last payment went to interest and how much went to principal. These two numbers always add up to your monthly payment.
Look for a line item labeled "Principal Payment" or "Principal Paid This Period" and another labeled "Interest Paid This Period" or "Interest Charge." Some statements call the interest charge "Finance Charge." The principal balance at the end of the statement is what you will owe next month if you make no additional payments.
If your statement does not break down the payment, you can calculate the interest yourself. Multiply your current principal balance by your annual interest rate, then divide by 12. That gives you the interest for one month. Subtract that from your monthly payment, and the remainder is principal.
Finding principal and interest on a savings statement
Your savings statement shows your principal balance — the total amount of your own money in the account — and the interest earned during the statement period. Interest is usually listed as "Interest Earned," "Interest Credited," or "Interest Paid." This amount gets added to your principal automatically, usually monthly or quarterly depending on the bank.
The principal balance grows in two ways: when you deposit more money, and when interest is added. If your statement shows a principal of $5,000 at the start of the month and $5,010 at the end, and you made no deposits, then you earned $10 in interest. That $10 is now part of your principal, so next month you will earn interest on $5,010, not just the original $5,000.
Some savings accounts show interest earned year-to-date, which means the total interest you have earned since January 1. If you want to know how much interest you earned in a single month, subtract the previous month's year-to-date interest from the current month's year-to-date interest.
How to calculate interest yourself if your statement does not show it
You need three pieces of information: the principal balance, the annual interest rate, and the time period (usually one month). The formula is: Principal × Annual Interest Rate ÷ 12 = Monthly Interest.
Example: You have a car loan with a principal balance of $15,000 and an annual interest rate of 6%. Multiply $15,000 by 0.06 to get $900. Divide $900 by 12 to get $75. You owe $75 in interest for one month. If your monthly payment is $300, then $75 goes to interest and $225 goes to principal.
For savings, the calculation is the same. If you have $10,000 in a savings account earning 4% annually, multiply $10,000 by 0.04 to get $400, then divide by 12 to get about $33.33 in monthly interest. The exact amount may vary slightly because banks use different methods to count days in a month.
Why the principal-to-interest split changes over time
On a loan, the interest you owe each month is always calculated on the remaining principal balance. As you pay down the principal, the interest owed shrinks. This is why early payments are mostly interest and later payments are mostly principal.
If you have a 30-year mortgage, your first payment might be 80% interest and 20% principal. By year 20, it might be 20% interest and 80% principal. The total payment stays the same, but the split shifts. This is why paying extra principal early in a loan saves you so much interest overall.
On savings, the opposite happens. As interest is added to your principal, the next month's interest is calculated on a larger balance. This compounding effect means your interest earnings accelerate over time, even if the interest rate stays the same.
Where to find your interest rate if you do not have it
Your interest rate should be on your loan agreement, savings account disclosure, or statement. Look for "Annual Percentage Rate" (APR) or "Annual Interest Rate." These are the same thing for savings accounts. For loans, APR may include fees, while the interest rate does not, but for this calculation either number works.
If you cannot find it on your statement, contact your lender or bank directly. They are required to provide this information. You can also log into your online account — most banks and lenders display the rate in the account details or settings section.
If you are trying to figure out what rate you are actually paying, you can work backward from your statement. Divide the interest charged by the principal balance, then multiply by 12. That gives you the annual rate. If the number does not match what your lender says, ask them to explain the difference — there may be fees or other charges included in your APR.
The difference between simple and compound interest
Simple interest is calculated only on the original principal. It does not change month to month. Most car loans and personal loans use simple interest. Compound interest is calculated on the principal plus any interest already earned. Savings accounts and credit cards typically use compound interest.
On a savings account with $1,000 at 5% annual interest compounded monthly, you earn about $51.16 in the first year, not exactly $50. The extra $1.16 comes from earning interest on the interest you already earned. Over decades, this difference becomes huge.
Your statement will tell you which type you have. Savings accounts almost always say "interest compounded monthly" or "daily." Loan agreements usually say "simple interest" or just do not mention compounding, which means it is simple.
Frequently Asked Questions
Can the principal ever go up on a loan?
Yes, if you miss a payment or if your loan agreement allows unpaid interest to be added to the principal. This is called negative amortization. It is rare on standard loans but common on some student loans and mortgages with income-driven repayment plans. Check your agreement or ask your lender if this is possible on your loan.
Why does my loan statement show a different principal balance than I calculated?
The difference is usually due to timing. If you made a payment after the statement was printed, the balance shown is from before that payment was processed. Also, some lenders round interest to the nearest cent, which can create small discrepancies. Call your lender if the difference is more than a few dollars.
If I pay extra principal, does my interest rate go down?
No, your interest rate stays the same. But paying extra principal means you owe less the next month, so the interest charged the next month is smaller. Over the life of the loan, paying extra principal saves you a lot in total interest.
How do I know if my savings account interest is compounded daily or monthly?
Check your account agreement or the disclosure statement your bank gave you when you opened the account. You can also log into your online account and look for account details or terms. If you cannot find it, call the bank and ask. Daily compounding earns slightly more than monthly, but the difference is usually small on savings accounts.
What if my loan has a variable interest rate?
Your principal balance calculation stays the same, but the interest portion of your payment will change when the rate changes. Your lender will send you a notice before the rate adjusts. After the adjustment, recalculate using the new rate to see how your payment will change.