Financial Glossary
Principal and Interest (P&I)
Principal and interest are the two components that make up most loan payments. Principal is the original amount borrowed that still needs to be repaid, while interest is the lender's charge for extending the loan, calculated as a percentage of the outstanding principal. As a loan amortizes, each scheduled payment covers the interest accrued for the period and applies the remainder to reducing the principal balance.
Problem & Application
For a real estate investor or campground owner financing a property, understanding the split between principal and interest matters because only the interest portion is generally deductible as a business expense, while principal repayment is not. Early in an amortizing mortgage, payments are interest-heavy and shift toward principal over time, which affects both cash flow planning and the tax picture. Tracking P&I accurately also feeds metrics like debt service coverage and net operating income.
In Short
Separating principal from interest in every loan payment is essential for accurate books, correct deductions, and a clear view of how fast you are actually building equity.