A principal payment is the portion of a loan payment that reduces the actual amount you owe, as opposed to the interest portion that pays the cost of borrowing. In a typical mortgage or loan payment, part goes to interest and part goes to principal reduction. As you make principal payments, your outstanding balance decreases, which in turn reduces future interest charges. Some borrowers make extra principal payments to pay off loans faster and save on interest costs. Loan amortization schedules show how each payment is split between principal and interest over the life of the loan.