Loan Proceeds and Principal – What’s the Difference?Uncategorized
Are you looking for a loan? In that case, you will encounter concepts such as loan proceeds and principal. Both are something that covers the loan amount – but each in their own way.
Before you embark on a loan, it is a good idea to familiarize yourself with the difference between the two concepts.
What is a Loan Proceeds?
Proceeds mean dividends or income. When used in connection with loans, however, it has a completely different meaning. This is usually called a loan proceeds and the specific amount you need to borrow.
This means that it is a term that covers the money you want to keep in hand when your loan is paid off. This is the desired loan amount that you must specify on your loan application with the loan company.
Example of a loan proceeds
If you want to borrow DKK 100,000, then this is your loan amount. In another word, it’s your loan proceeds. However, you should expect that borrowing costs are imposed, which is why the exact loan amount will be higher.
It is the total amount you have to pay back and not your loan proceeds. Normally, both a foundation commission of approx. 2% and a loss of value, which must therefore also be taken into account when borrowing money.
What is a Principal?
The principal is the total amount you actually borrow. It is also this amount that will subsequently be repaid and must be repaid. However, the principal will remain the same throughout the course.
This means that even if you pay off your repayments on the loan, the principal will not decrease. The principal of your loan consists of several different parts. This includes the following:
- Capital losses
- loan Proceeds
- Initial costs
Your principal is a fixed amount that will change only if either you or your lender chooses to change the original conditions of the loan. This may be, for example, the case of a complete repayment of your loan.
Principal and residual debt are not the same
It is important that you do not confuse the principal with the outstanding debt. There is only one time when the two amounts will be the same if the loan is not paid off. And of course it is only in the beginning that it is relevant.
You can calculate your outstanding debt by deducting repayments from your principal. Unfortunately, many people do not understand the difference between the two concepts – nor the difference between principal and proceeds.
What is a principal used for?
A principal is used, among other things, in the event that you have to find out what you must have repaid on your loan in total before you can consider your loan to be repaid.
In other words, it is the actual size of the loan. However, it is not the same with the amount you get paid and this is where it goes wrong for many. They believe that the principal and the amount paid are the same.