A principal and interest (P&I) loan is one where the loan is fully repaid over a set, pre agreed period. The repayments, usually monthly, are calculated to pay all of the interest and enough of the principal so that the loan is repaid in this agreed period.
Each time a repayment is made, a small amount of principal (the amount owing) is paid off the loan. Most P&I loans are calculated on the daily balance of the loan, thus as soon as any principal is paid off the loan, the interest payable is reduced.
Since the payments remain the same each month, the proportion of the payment applied to reducing the principal increases each month and the portion required to pay the interest reduces each month until the loan is fully paid.
The majority of lenders will allow terms of up to 30 years to repay a residential housing loan.
Principal and interest loan