What is Principal Amount and Interest? Full Explanation with Examples

Updated on: 24 Apr 2025

When you take a loan, three things decide how much you’ll repay in total — the loan principal amount, the interest rate, and how long you take to repay it. That’s why it’s super important to understand how these factors affect your loan and monthly budget.

By calculating the interest in advance, you can see if the loan fits your needs and even tries to negotiate better terms. This can help you save a good amount over time!

Let’s break down how to calculate the principal and interest with simple examples — plus some smart tips to lower your total interest.

What is Principal Amount and Interest in Loan?

A principal is the sum of money you borrow from your lender. Similarly, interest is the cost of borrowing for extending their services and is a percentage of the principal charged by the lenders. These numbers form the core factors for calculating your interest and EMI amount.

When you apply for a loan, the lender offers you an interest amount based on your eligibility, which dictates your borrowing costs. You can calculate your monthly loan instalment with the formula:

EMI = [P X R X (1+R) ^N]/[(1+R) ^N-1]

Where P = Principal, R = Annual interest rate, N = Total tenure

While manual calculations can get tough, using an online personal loan EMI calculator is ideal to get accurate results. Note that each EMI payment goes toward clearing the loan principal and interest charged.

The Formula for Principal and Interest

The interest is computed based on your outstanding loan amount. The Annual Percentage Rate (APR) implies the annual cost of your loan. It includes various other costs, such as:

Processing charges
Administrative fees
Insurance premiums, etc

Therefore, you can calculate the interest paid for the first month with the formula:

Interest Repayment = Principal Loan Amount X Annual Percentage Rate /12

After calculating the interest, you must subtract this sum from the EMI to calculate the principal amount paid. Thus, the principal amount formula is:

Principal Repayment = EMI – Interest Repayment

This Principal Repayment is then subtracted from the opening loan principal. It is done to calculate the outstanding principal:

Outstanding Principal = Opening Loan Amount – Principal Repayment

This way, you can calculate next month’s interest repayment amount using this outstanding principal. Following steps until the end of tenure will create an amortisation schedule.

Interest Amount Formula

The interest amount can be calculated with the simple formula:

SI = (P X R X T)/100

In this formula, P stands for principal amount, R stands for the rate of interest, and T stands for time or tenure.

Principal Amount Formula

To find the principal amount within a simple interest investment or loan, the applicable formula is:

A= P (1+rt)

In this formula, ‘A’ is the current value known, ‘r’ will be the decimal value of interest rate per time, and ‘t’ will be the time period number.

Principal and Interest Calculations

Here’s an example to better understand the process of calculating the principal amount and interest. Say you take a personal loan of ₹25,000 and your interest rate is 16% p.a. for a tenure of 12 months. Then:

P = ₹25,000, R = 16%/ 12 or 1.3% per month, N = 12 months

So, EMI = [P X R X (1+R) ^N]/[(1+R) ^N-1] = ₹2,268. EMI = ₹2,268

Now, the principal amount will attract interest as such:

Interest Repayment = Principal Loan Amount X Annual Percentage Rate /12
Interest Repayment = ₹333.33

To calculate the principal paid in the first month:

Principal Repayment = EMI – Interest Repayment
Principal Repayment = ₹2,268 – ₹333.33
Principal Repayment = ₹1,934.67

To calculate the outstanding balance:

Outstanding Principal = Opening Loan Amount – Principal Repayment
Outstanding Principal = ₹25,000 – ₹1934.67
Outstanding Principal = ₹23,065.33

Using this outstanding balance, we calculate the interest for the next month and so on.

How to Reduce Your Interest Burden?

Since a high interest affects your total repayable amount and your EMI, you must opt for the lowest interest option to save more. Here are a few steps you can follow for doing so:

Improve your credit score before applying
Choose a longer tenure option to lower interest rate
Negotiate with your lender for better loan terms
Lower your credit utilisation ratio
Opt for prepayment and foreclosure options based on the amortisation schedule

Note that these terms depend highly on your eligibility and credit behaviour. A high credit score and good repayment history result in lenders offering loans at an attractive interest rate.

With the Fibe Instant Cash Loan, you can easily get an amount of ₹5 lakhs at a nominal interest rate with quick disbursal. You can also choose from a flexible tenure range of up to 36 months. Download the Personal Loan App on the Google Play Store or App Store or visit our website to apply now!

FAQs on Principal and Interest Calculation

How do you find the principal amount?

The principal amount is the amount of loan applied by an individual or a business entity. You can find it in the loan agreement provided by the lender.

What is the principal formula in Excel?

The formula for calculating principal in Excel is:

=PPMT (rate, period, number_of_periods, present_value)

In the formula,

Rate is the interest rate
Period is the total tenure
Number_of_periods is the number of months in a year
Present_value is monthly EMIs

What is the principal amount on a loan?

The principal amount on the loan is the sanctioned value credited to your bank account by the lender. So, if you apply for a ₹5 lakhs loan, this amount is your principal amount.