Accounting Dictionary

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Unpaid Principal Balance

Definition: Unpaid Principal Balance is that portion of a loan that has not yet been paid back to the lender. A typical loan payment is comprised of both an interest charge and the return of some principal, so the unpaid principal balance cannot be calculated simply by subtracting all loan payments to date from the original amount of the loan. Instead, you must also add back the amount of interest paid to the lender to arrive at the unpaid principal balance. Thus, the calculation is:

Original loan amount - Total of loan payments to date + Total interest paid to date

Thus, if ABC Company takes out a $1 million loan, has made $300,000 in loan payments since then, and the interest component of those payments was $200,000, then the unpaid principal balance is $900,000.

The interest charge contained within the next period's loan payment is derived from the unpaid principal balance at the end of the preceding period.