Every loan, regardless of which product or loan type, is made up of two elements; principal and interest. The principal is the actual amount of money borrowed, and the interest is the extra money a client has to pay back on top of the loan for the privilege of borrowing it. This is, the fee they pay for the use of that money (think of it as money being just another commodity that can be bought and sold, and the interest paid is the fee for using that commodity).

A Principal and Interest loan is probably the most utilised loan of all. This type of loan allows a client to make regular repayments, which consist of two portions. One portion of the repayment is paying off the principal, and the remainder is servicing the interest that has accrued on the balance of the principal (what's left to pay off). Basically it means that the client is paying off the loan as well as servicing the interest on that loan.

A P&I loan allows a client to build up equity in the property by paying off the loan (the principal) as well as servicing the interest. The equity is that portion of the property value that has no money owing on it. For example, if the security property was worth $200,000 and the client owed $150,000 on it, they would have $50,000 equity in their property. This type of loan is particularly useful when purchasing an owner occupied property, as it will allow a borrower to build up equity to use later on if they want to cross-secure (use more than one property as security for the loan) a loan to purchase an investment property. You would generally give a client a P&I loan on a property that they don't intend to sell in the immediate future, or if they were taking a mortgage on their property to pay off another type of loan, say a car loan for example, which would originally have had a higher interest rate, and has had no capital gain (increase in value), when they sell the car.

P&I loans are generally taken over a term of 25 years to 30 years (the term is the time that the loan repayments are calculated over, which will also be the maximum time to pay off the loan if the client just paid their minimum monthly payments and nothing extra). The longer the term the less the minimum monthly repayment amounts will be. If they are an older borrower, or their loan presents a higher risk for one reason or another, some lenders may require them to take a P&I loan over a shorter term, like 15 or 20 years etc. Just because the loan has a nominated term (say 25 years) it doesn't mean that they have to take that long to pay out the loan. It simply means that the repayments have been calculated over that period of time.