Key takeaways
- A principal-only car payment is an extra payment that is applied to your auto loan balance when there is no interest due.
- Lenders don’t always automatically apply extra payments to the principal, so you may need to make a specific request.
- 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, making a principal-only payment on your car loan can be a good idea. Extra payments can help you build equity, save on loan interest and pay off your auto loan faster.
Make sure you allocate extra payments in a way that saves you the most money. If your lender doesn’t apply extra payments to your principal, you won’t benefit as much — but there is nothing wrong with getting ahead of your monthly payments.
What is a principal-only car payment?
When you pay more than the minimum monthly payment, you are making a principal-only car payment. Every lender handles it differently, but often, you will need to specify how you want extra payments to be applied.
With a principal-only payment, the extra funds should be applied directly towards the principal because this reduces the total amount you owe. If you aren’t sure what your lender’s policy is, review your loan contract or reach out to customer support to determine how additional payments are applied.
What is the principal of a loan?
The principal of a loan is the original amount you borrowed. For an auto loan, the principal is usually the out-the-door (OTD) price along with any other fees or taxes you included in your financing agreement.
How to make a principal-only payment
Before you make a principal-only payment, check with your lender to see if it allows them or charges a prepayment penalty. Some lenders may apply the payment to the principal automatically, but typically, your monthly car loan payment is split between the principal balance, the accumulated interest and any fees. Other times, lenders may apply extra funds to next month’s payment, which won’t reduce your principal.
Your lender may require you to notify it when making an additional payment to the principal. This may only require that you select the principal-only option when making a payment online, but your lender may require 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.
Benefits of making extra principal payments
A smaller principal means less interest and a faster payoff date. Every payment that goes solely toward your principal also builds equity in your car, which reduces the risk of owing more than your car is worth — known as an upside-down car loan.
The most common financing option, simple interest auto loans, calculates interest as a percentage of the total principal you owe. As you reduce the principal amount owed, less interest will accrue.
Since the main benefit is saving money over the long term, you can use an early payoff calculator to see how additional monthly payments will reduce the total interest paid and the amount of time spent paying the loan.
Take a $42,000 auto loan with a 6.35 percent APR and a 60-month term. By paying even a little extra each month, you can save hundreds in interest and cut multiple months off of your loan term.
| Additional monthly principal-only payment | Total interest paid | Total cost-savings | Loan term reduction |
|---|---|---|---|
| $0 | $7,130 | $0 | 0 months |
| $50 | $6,638 | $492 | 4 months |
| $100 | $6,211 | $919 | 7 months |
Does paying down the principal on a car loan affect your credit?
It can. Early repayment 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 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.
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Schedule biweekly payments: You may not have the money to make a full payment twice a month, but making a half payment every other week can reduce the overall interest paid.
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Pay more than your minimum. Similarly, you may be able to round up your payments to the nearest hundred. Every little bit helps when it comes to paying down the loan faster.
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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.
Bottom line
Making principal-only payments is an effective way to save money and manage your auto loan. Contact your lender to find out if it applies payments directly toward the principal. If it is an option, ensure you know how to notify your lender when you do.
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.
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