What is Principal? | Learning About How Payday Loans Work

Home » What is Principal? | Learning About How Payday Loans Work

If you’re thinking about borrowing money from a payday lender–also called taking out a payday advance–it’s important to understand some of the “fine print” of the arrangement. Specifically, it is crucial to understand the component parts of the loan you’re taking out.

Every loan is, at its core, composed of two different parts: principal and interest. This remains true whether you’re borrowing a lot of money for a large purchase such as a home or car, or if you just need a little extra cash before your next payday.

We’ll teach you everything you need to know about interest here, but for now we will focus on principal.

What is principal?

When you take out a payday loan, you’re borrowing a certain amount of money. For the sake of an example, let’s say you borrow $250. This initial sum of money that you borrow is the “principal” of the loan.

The principal, in other words, is the amount of money that you need to bridge the gap to your next payday and is the amount that you will have to pay back to the lender when your next paycheck hits your bank account.

Why does this matter?

The principal is a critical figure to keep in mind because it is the amount off of which other factors will be determined, particularly interest. If a lender is charging you an interest rate for the principal you’re borrowing–let’s say 10%–then your total principal amount will be multiplied by the interest rate to determine how much principal and interest you’ll need to pay back.

While that sounds somewhat complicated, the good news is that with payday loans the math is generally a lot easier.

If you’re borrowing money from a payday lender, they generally charge a small, fixed amount as the interest rate that increases as the principal you borrow increases. A general rule of thumb is that a payday lender will charge you $15 in interest per $100 of principal that you borrow.

Principal is a very important concept to keep in mind because it is generally the biggest part of the cash you will need to pay back to the lender once your next paycheck hits. If you borrow $100 in principal and the lender charges you $15 in interest, then on your next paycheck you’ll need to pay back a total of $115. That final figure–principal plus interest–is the figure that you’ll need to budget for to ensure that you have enough cash on your next payday to pay your lender back.

If you’re looking to borrow cash the same day for an unexpected expense, a payday loan can be a great tool. Apply now with Direct Payday Loans to quickly compare terms from a number of lenders!