Principal

The principal $L$ is the original amount borrowed in a loan.

It is the basis on which interest is computed in the first period ( $\text{Interest}_1 = L \times i$ ).
Over the life of an amortized loan, each payment covers interest on the Outstanding Balance plus a portion of principal repayment; the outstanding balance decreases until the entire principal has been returned to the lender by the final payment.
The distinction between principal and interest is important for tax purposes, accounting, and the construction of an Amortization Schedule.

Principal vs Interest in a Loan Payment A borrower takes out a $ $15{,}000$ loan at $6\%$ annual interest, to be repaid with level annual payments over 5 years. How much of the very first payment is principal and how much is interest?

Answer Payment: $P = 15000 / a_{\overline{5}|6\%} = 15000 / 4.212364 = \$3{,}560.95$

Interest in payment 1: $I_1 = L \times i = 15000 \times 0.06 = \$900.00$

Principal in payment 1: $PR_1 = P - I_1 = 3560.95 - 900.00 = \$2{,}660.95$

After the first payment the outstanding balance is $15000 - 2660.95 = \$12{,}339.05$ . In subsequent payments the interest portion shrinks and the principal portion grows, but the total payment stays constant at $ $3{,}560.95$ .