When you take out a loan, the principal is the original sum of money that you borrow, which you are obligated to pay back, not including any interest. In your case, if you take out a $1000 loan for college, the principal amount is simply $1000.
To further clarify, let’s break down the components of the loan:
- Principal: This is the amount of money you borrowed, which in this scenario is $1000.
- Interest Rate: This refers to the cost of borrowing money. In your case, the interest rate is 7%. This means that for each year you hold the loan, you will incur additional costs based on this percentage of the principal.
- Total Cost of the Loan: Over time, the interest accumulates, and the total amount you will repay will be higher than the principal. For a loan at a 7% interest, if you pay it back after one year, you would owe $1000 + ($1000 * 0.07) = $1070.
In summary, the principal of your loan is $1000. However, be mindful of the interest that will be added on top of this amount as you plan your finances for college.