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
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.
Why can't i make a principal-only payment? ›
Some lenders don't offer the ability to make principal-only payments. To find out if you have this option, call your lender and ask if and how you can make a principal-only payment. If the lender allows principal-only payments, make sure you understand the process and check that your payment is applied correctly.
What happens if I pay an extra $200 a month on my car loan? ›
Your car payment won't go down if you pay extra, but you'll pay the loan off faster. Paying extra can also save you money on interest depending on how soon you pay the loan off and how high your interest rate is.
Do extra payments automatically go to principal? ›
Any funds you pay in addition to your monthly payment amount will be automatically applied to your principal balance unless you specify otherwise.
Do banks 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.
Can you pay off a 72 month car loan early? ›
There are no legal restrictions to paying off your auto loan early but it may come with fees from your auto loan provider. Paying off a car loan early can be a good option to save money and reduce your debt, but whether it is a good idea depends on your unique financial situation.
How do I pay just the principal on a loan? ›
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.
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 do I get my principal payment? ›
Step 1: Convert your annual interest rate to a monthly rate by dividing by 12. Step 2: Multiply your loan amount by your monthly interest rate to get your monthly interest payment. Step 3:To calculate your monthly principal payment, subtract your monthly interest payment from your total monthly payment.
What is the car payment on a $30,000 car? ›
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.
By paying half of your monthly payment every two weeks, each year your auto loan company will receive the equivalent of 13 monthly payments instead of 12. This simple technique can shave time off your auto loan and could save you hundreds or even thousands of dollars in interest.
What is the best way to pay off a car payment? ›
Always make your scheduled monthly payment, and consider making additional payments biweekly. Paying this way is equivalent to making an extra payment in that month. Round Up: Making smaller “rounded-up” payments each month will help you pay off your loan quicker.
How do I make payments to the principal of my car? ›
If you want to pay toward the principal part of your car loan, you have to specify your intentions. Contact your lender and ask about the process for making principal-only payments. Some lenders may require you to submit your request in writing or check a particular box when you make a payment.
What happens if I pay more principal on my car loan? ›
Paying extra on your auto loan principal won't decrease your monthly payment, but there are other benefits. Paying on the principal reduces the loan balance faster, helps you pay off the loan sooner and saves you money.
Is it better to pay extra on principal weekly or monthly? ›
Since your interest is calculated on your remaining loan balance, making additional principal payments every month will significantly reduce your interest payments over the life of the loan. By paying more principal each month, you incrementally lower the principal balance and interest charged on it.
What happens if you pay off your principal 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. The cost of those fees may be more than the interest you'll pay over the rest of the loan.
Is it better to pay on the principal or interest? ›
Because interest is calculated against the principal balance, paying down the principal in less time on your mortgage reduces the interest you'll pay. Even small additional principal payments can help. Here are a few example scenarios with some estimated results for additional payments.
Does a principal only payment lower monthly payments? ›
Advantages of Paying off Principal
It's important to recognize that paying off principal will not lower your monthly payments. In fact, it will mean you're paying more each month. Putting extra money toward your car loan, however, offers some benefits.
