What is true about the principal amount of a loan?

The principal amount of a loan refers specifically to the total amount borrowed by the borrower, exclusive of any interest or additional fees. When a borrower takes out a loan, the principal is the original sum they receive from the lender, which must be repaid over the term of the loan. Understanding the principal is crucial for financial literacy, as it impacts how much a borrower will pay in interest over the life of the loan.

For example, if someone takes out a mortgage for $200,000, that figure is considered the principal. The interest rate applied to this principal determines the cost of borrowing and the total payment amount over time.

The other options do not accurately define the principal amount. It does not include interest, as that is calculated separately. It also does not cover closing costs, which are additional fees incurred during the loan process. Finally, the remaining balance on the loan, which changes over time as payments are made, is not the same as the original principal amount. Thus, the correct definition relates directly to the total amount borrowed, highlighting the fundamental concept in understanding loans and mortgages.