Key takeaways
- A principal-only car payment is an extra payment on your auto loan that is applied only to the principal amount of the loan.
- Lenders don’t always automatically apply extra payments to the principal.
- Making principal-only payments can help you pay off your auto loan faster and save you money on the loan.
If it’s possible for your budget, paying extra towards your auto loan can be a good idea. Making principal-only payments on your car loan can help you build equity, save on loan interest and pay off the loan faster.
But make sure you allocate extra payments in a way that saves you the most money. If your lender won’t apply extra payments to your principal, you won’t benefit as much.
What is a principal-only car payment?
The principal on your car loan is the sum of money you borrowed from the lender. Your typical monthly payment goes toward what you owe on the principal, the accumulated interest and loan fees. The lender usually applied the monthly payment to fees and interest first. Any remaining amount from your monthly goes towards the principal.
Paying extra money towards the loan’s principal is called a principal-only car payment. Every lender handles extra payments differently, but often, you will need to specify how you want extra payments to be applied.
Benefits of making principal-only payments
When you make extra payments on the principal, you save on your interest over time. With a simple interest loan — which make up the vast majority of car loans — interest is a percentage of the principal you owe. As you pay down the principal amount, your accrued interest becomes less and less. However, with precomputed interest loans, lenders front-load interest on your loan payments, so you benefit less from early payoff.
Every payment that goes solely toward your principal builds equity in your car. As you build equity in your car, you get closer to owning it outright. It also reduces the risk of owing more than your car is worth — also called being upside-down on the loan.
If I pay extra on my car loan, does it go toward the principal?
When you make extra payments on your car loan, it’s important to know how the lender applies these payments.
Ideally, you want your extra payments to go towards the principal amount. However, many lenders will apply the extra payments to any interest accrued since your last payment and then apply anything left over to the principal amount. Other times, lenders may apply extra funds to next month’s payment.
Does paying down the principal on a car loan affect your credit?
Paying off your loan early will likely impact your credit score by bringing it down a few points in the short term, but it can also make your score higher in the long term. Early repayment shows that you are responsible with your debt. But be sure to consider how it may impact your credit mix, your payment history and your debt-to-income ratio before you decide to pay the loan off early.
How to make a principal-only payment
Before you make a principal-only payment, check with your lender to see if it allows this type of payment and how to go about making one. Some lenders may apply the payment to the principal automatically.
However, lenders usually require that you let them know when you make the payment that it is for the principal only. This may only require that you check the principal-only box when you make a payment online. Other times, the lender may ask you to make this request in writing.
If your lender doesn’t offer the option to make a principal-only payment, you may still be able to pay down your loan faster.
How to pay down your car loan faster
If you can’t make principal-only payments, you may still be able to pay off your car loan ahead of schedule. Make sure your lender doesn’t charge prepayment penalties before making additional payments.
- Schedule biweekly payments: You may not have the money to make a whole payment twice a month, but making a half payment every other week can cut down on the overall interest paid, depending on how it’s calculated. Remember, this only works out if it is a simple interest auto loan, as precomputed interest will be applied the same regardless of when payments are made.
- Pay a little more than your minimum payment each month: Check with your lender to see if it allows this type of payment and how to go about making one. Every little bit helps when it comes to paying down the loan faster.
- Make extra lump-sum payments: If you get a bonus or tax refund, you can put it towards your car loan if it wouldn’t be better spent elsewhere.
The bottom line
If you have the means, making principal-only payments on your auto loan is the most effective way to save on your car loan. Contact your lender to find out if they accept payments like this. If they do, ensure you know how they want you to alert them when you make a principal-only payment.
Remember that every bit counts when it comes to paying down your loan. Adding any extra payment to your regular monthly payment can help you pay off your loan faster.
FAQs
If you have the means, making principal-only payments on your auto loan is the most effective way to save on your car loan. Contact your lender to find out if they accept payments like this. If they do, ensure you know how they want you to alert them when you make a principal-only payment.
How to make a principal only payment? ›
Many lenders offer the option to put money toward your principal. Select that option and specify your amount and date. Phone payments: You can call your lender to make an additional payment toward your principal. Have your account information ready.
How to pay off a 6 year car loan in 3 years? ›
Below are the methods you should consider to pay off your car loan faster:
- Refinance your car loan.
- Split Your Bill Into Two Biweekly Payments.
- Make a large down payment.
- Round up your car payments.
- Review additional car expenses.
Paying extra toward the principal won't lower your monthly car payment. It may save you money in the long run by shortening the loan.
Can you pay off a 72 month car loan early? ›
Can you pay off a 72-month car loan early? Yes, you can pay off a 72- or 84-month auto loan early. Since these are long repayment terms, you could save considerable money by covering the interest related to a shorter period of time.
What happens if I pay my car payment twice a month? ›
Although it may not seem like much, paying twice a month rather than just once will get you to the finish line faster. It will also help save on interest. This is because interest will have less time to accrue before you make a payment — and because you will consistently lower your total loan balance.
How to pay more towards principal on car loan? ›
Making bi-weekly payments instead of monthly payments can get you out of debt sooner. Say, for example, an auto loan is $700 per month, a borrower may opt to make bi-weekly payments of $400. Those bi-weekly payments add up to $800 per month, resulting in an extra $100 per month that only goes toward the principal.
How to pay off principal faster? ›
Here are some ways you can pay off your mortgage faster:
- Refinance your mortgage. ...
- Make extra mortgage payments. ...
- Make one extra mortgage payment each year. ...
- Round up your mortgage payments. ...
- Try the dollar-a-month plan. ...
- Use unexpected income.
Rather than delaying credit until the next month, the optimal day within the month to make an extra payment is the last day on which the lender will credit you for the current month.
What is the quickest way to pay off a car loan? ›
The fastest way to pay off a car loan is to simply pay cash for the remaining balance, but make sure to get a pay-off quote before sending in that payment, because it doesn't always align perfectly with the amount shown on your statements.
A $30,000 auto loan balance with an average interest rate of 5.0% paid over a 6 year term will have a monthly payment of $483. In total, the loan will cost $34,787 with $4,787 in interest.
How much of my car payment goes to principal? ›
Your car payment will be a mix of the principal and interest. During the early part of the loan term, you will pay more interest than principal. Over time, more of the payment goes to pay the principal. The last few payments will be mostly principal with little interest left.
Is it better to make two payments a month on a car loan? ›
Splitting the payment in half and paying twice a month (semi-monthly) saves money. Why? On an auto loan, interest compounds daily. By paying half your payment early, you actually cut down the principal faster, thereby reducing the corresponding compounding interest you'll pay over the life of the loan.
What is too high of a monthly car payment? ›
According to experts, a car payment is too high if the car payment is more than 30% of your total income. Remember, the car payment isn't your only car expense! Make sure to consider fuel and maintenance expenses.
Is it better to refinance or pay extra principal on a car loan? ›
Paying extra payments toward the principal in your car loan will shorten the overall length of your loan. While you'll be paying more every month, you'll be paying the loan back for fewer months total. You'll also build equity much faster.
Can I pay off the principal on my car loan early? ›
Prepayment penalties
Some lenders charge a penalty for paying off a car loan early. The lender makes money from the interest you pay on your loan each month. Repaying a loan early usually means you won't pay any more interest, but there could be an early prepayment fee.
Do lenders allow principal-only payments? ›
While all states allow principal-only payments on mortgages, all lenders may not. Talk to your lender about making additional payments toward your principal. If it's a repayment strategy you may consider, you should know Rocket Mortgage allows principal-only payments.
How does principal work on a car loan? ›
The amount of money you're borrowing is known as your principal. The interest is the cost you pay for borrowing money. Interest and fees are generally paid before your payments go towards your loan's principal.
Is it better to put money down on a car or pay extra principal? ›
YOU'LL GET A BETTER DEAL ON A CAR LOAN
If you make a down payment, you'll still finance or borrow the remainder of the cost. But the payment reduces your loan-to-value ratio—the amount of your loan divided by the cash value of the vehicle. A lower loan-to-value ratio often leads to better loan deals.
