Principal is the original amount borrowed on a loan — separate from interest. Each loan payment splits between paying down principal and paying interest. Early in an [[amortization]] schedule, most of the payment goes to interest; as the loan matures, more goes to principal.
When you take out a mortgage, auto loan, personal loan, or business term loan, the amount you borrow is the principal. Interest is the cost the lender charges for that capital, calculated as a percentage of the outstanding principal balance. In a fully [[amortization|amortizing]] loan, each monthly payment is divided between interest — calculated as (outstanding principal × monthly interest rate) — and principal reduction. In early payments, the outstanding balance is high, so the interest portion is large. As principal decreases, the interest portion shrinks and more of each payment reduces the balance. A standard 30-year mortgage at 7% sees roughly 88% of the first payment going to interest; by year 25, the split has reversed. Prepaying principal — making extra payments directed to principal — has an outsized effect because it reduces the balance on which future interest is calculated. A $1,000 principal prepayment in year 3 of a 30-year mortgage saves far more than $1,000 in total interest costs because it eliminates interest on that $1,000 for the remaining 27 years.
It depends on the interest rate. Prepaying a 7% mortgage 'earns' you a guaranteed 7% return (risk-free). If you can consistently earn more than 7% after tax in the market, investing may be better. This is an individual financial decision — consult a financial advisor.
An additional payment directed entirely to reducing your loan balance, not split between principal and interest. Most servicers allow you to designate extra payments this way, but confirm the application with your servicer.