1. Principal is the amount borrowed
The starting principal is the amount financed. On a reducing-balance loan, outstanding principal falls as repayments are applied.
Tip: Principal answers: how much debt remains?
2. Interest is the price of borrowing
Interest is charged according to the loan's rate method and contract. In a reducing-balance loan, later interest is calculated on a lower outstanding balance as principal is repaid.
Tip: Rate type and reset rules matter as much as the percentage.
3. Tenure stretches repayment across time
Longer tenure usually lowers EMI because repayment is spread across more months, but it can increase total interest because the balance remains outstanding for longer.
Note: Lower EMI can simply mean slower repayment.
4. Principal, rate and tenure work together
Change any one and EMI or total cost can change. Use a calculator and amortisation schedule before signing, rather than optimising one number in isolation.
Tip: Optimise the whole loan, not one variable.
5. Quick check
Same principal and rate: 3 years vs 5 years. What is generally true?
Answer: A - More months usually lower each EMI but keep principal outstanding longer.