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Is 'principal balance' same as 'Outstanding Balance'? My understanding is - In amortisation schedule, Outstanding balance gets reduced according to 'principal' portion of your monthly payment. After 6 months of origination, if someone ask you what's the principal balance, it means he/she is referring to 'Outstanding Balance'. Is my understanding correct?

Let's say this is the loan terms and interest rate -

+----------------------+----------+
|        Amount        |  30,000  |
+----------------------+----------+
| Annual Interest Rate | 8.4%     |
| Payments per year    | 12       |
| Years                | 6        |
+----------------------+----------+


+----------------+--------------------+----------+-----------+-------------+
| Payment Number | Monthly Instalment | Interest | Principal |   Outstanding Balance   |
+----------------+--------------------+----------+-----------+-------------+
|              1 | £531.88            |  210.00  |   321.88  |  29,678.12  |
|              2 | £531.88            |  207.75  |   324.13  |  29,354.00  |
|              3 | £531.88            |  205.48  |   326.40  |  29,027.60  |
|              4 | £531.88            |  203.19  |   328.68  |  28,698.91  |
+----------------+--------------------+----------+-----------+-------------+

In this case, Outstanding Balance is Original Amount - Principal. What is the current principal balance in each payment number?

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  • Add a line 0 where the outstanding balance is 30,000 (because you haven't made a payment yet). The outstanding balance on line i is just the outstanding balance on line i-1 minus the principal portion of payment number i.
    – chepner
    Mar 20 '20 at 18:33
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TL;DR - "principal balance" is the loan amount without any added interest/fees and "outstanding balance" is the total amount of the loan including interest/fees (so they can be the same if there's no interest).

Principal balance usually has to do with the original loan amount or the remaining principal after re-amortization. The outstanding balance usually implies that extra interest/fees has been accrued.

In your specific example the "outstanding balance" and "principal balance" are the same thing since it does not include any interest. Once the next month's interest gets added to the balance, the two are different. The principal column has to do with the amount of principal that is paid off with each monthly payment, like you correctly said in the question.

if someone ask you what's the principal balance, it means he/she is referring to 'Outstanding Balance'

Assuming no interest has accrued then yes, they are the same.

For some loans, the interest or fees can be capitalized into the principle if you miss payments or for other reasons (some student loans do this when you graduate). Using the example above say the $210 in interest is capitalized. Now the principal balance is $30,210 and the outstanding balance is also $30,210. The capitalized interest (which is now part of the principal balance) now begins to increase the amount of subsequent interest applied to the loan.

5
  • Thanks. I added more details in my original question. Can you help clarifying with the example I posted above?
    – DBD
    Mar 20 '20 at 18:27
  • @DBD Edited based on the new question
    – Nosjack
    Mar 20 '20 at 18:32
  • Thanks. In case borrower does not make payment on time, principal balance will be different than outstanding balance. Correct?
    – DBD
    Mar 20 '20 at 18:40
  • @DBD Yes, if they miss a payment then the principal balance stays the same but the outstanding balance is (principal balance) + (interest)
    – Nosjack
    Mar 20 '20 at 18:50
  • @DBD even if you do make your payment on time, there will be some accrued interest when the payment is due, which is why only something of your payment is applied to the principal.
    – Kat
    Mar 20 '20 at 21:03
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You will sometimes see two numbers when looking at a loan balance.

One will represent the principal balance. This is how much of the loan remains.

The other will be the outstanding or payoff balance as of this moment in time. Everyday after your most recent payment interest accrues.

So if you make a payment on the 13th, and then you check on the 20th; the outstanding balance will include a weeks worth of interest. On the day the payment is made they should be equal. Note some loans work slightly differently when you pay ahead, or make a larger than required payment.

your specific example:

+----------------+--------------------+----------+-----------+-------------+
| Payment Number | Monthly Instalment | Interest | Principal |   Outstanding Balance   |
+----------------+--------------------+----------+-----------+-------------+
|              1 | £531.88            |  210.00  |   321.88  |  29,678.12  |
|              2 | £531.88            |  207.75  |   324.13  |  29,354.00  |
|              3 | £531.88            |  205.48  |   326.40  |  29,027.60  |
|              4 | £531.88            |  203.19  |   328.68  |  28,698.91  |
+----------------+--------------------+----------+-----------+-------------+

In this table the outstanding balance is the principal balance, but between the payments if the bank was to show you the outstanding balance it would include the interest accrued.

2
  • Thanks. I added more details in my original question. Can you help clarifying with the example I posted above?
    – DBD
    Mar 20 '20 at 18:27
  • Thanks. In case borrower does not make payment on time, principal balance will be different than outstanding balance. Correct?
    – DBD
    Mar 20 '20 at 18:40

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