What is the outstanding balance owed on a debt called?

Prepare for the Accredited Financial Counselor Exam. Study using flashcards and multiple-choice questions, each equipped with hints and elaborate explanations. Equip yourself for success!

The outstanding balance owed on a debt is referred to as the principal. This term encompasses the original sum of money borrowed or the remaining balance that is yet to be repaid, excluding any interest or additional fees that may accrue over the term of the loan. Understanding the distinction between principal and interest is crucial in personal finance, as it allows individuals to grasp the structure of their debts and how payments are applied.

In the context of debt repayment, payments are often applied first to interest and then to the principal balance. This means that the principal is what ultimately reduces the total amount owed, which is fundamental knowledge for anyone managing debt or working to improve financial health.

In contrast, interest refers to the cost incurred for borrowing the money, equity relates to ownership in an asset after subtracting liabilities, and collateral is an asset pledged to secure a loan. These concepts, while important in their own right, do not define the actual balance that a borrower owes on a loan.

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