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How paying the principal affects your car loan Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial choices by providing you with interactive tools and financial calculators that provide objective and original content, by enabling you to conduct your own research and compare information for free – so that you can make sound financial decisions. Bankrate has partnerships with issuers including, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The deals that are advertised on this site come from companies that compensate us. This compensation could affect how and where products appear on the site, such as, for example, the order in which they may appear within the listing categories and other categories, unless prohibited by law. This applies to our mortgage home equity, mortgage and other home lending products. However, this compensation will affect the information we publish, or the reviews appear on this website. We do not include the entire universe of businesses or financial offers that may be accessible to you.
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3 min read published September 27 2022
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Repaying the principal amount on your car loan can be a good way to quickly build equity in your vehicle. Usually, you will need to indicate your lender that the money is to be made only to the principal, either via the internet or by phone. Each lender uses its own method however, and they may not accept payments made solely for principal. What is a principal-only vehicle payment? A principal-only car payment is a type of payment that goes only towards the principal balance of your loan and is separate from your regular monthly payments. Principal is simply the amount that you borrowed initially, but with no additional interest. The aim of this extra payment is to help speed up repayment of the debt. Every payment that goes only to your principal will build equity in your vehicle. When you accumulate equity in your car, you get closer to owning it outright. This also lowers the chance of having to pay more than the car is worth. This is which is also known as having to pay for the loan. How to pay down the principal on an auto loan Making a principal-only payment on your vehicle is a great way to pay down your balance quicker. Although it’s not available across every lender, you’ll probably need to inform the lender that your payment is for the principal balance only, and not an early payment for the following installment. Make sure to check with your lender to find out whether they allow this kind of payment, and then go about making one. If your lender does not offer the option to make a principal-only loan, you may still be able to pay down your loan more quickly. How can you pay off your car loan faster If you’re not able to pay in principal-only installments but you could be able to still get rid of your auto loan . Be sure to ensure that your lender isn’t charging before making additional payments. Make biweekly installments: You may not have the money to pay for a complete payment every month but a half payment every other week could reduce the total amount of interest you pay based on how it’s calculated. It only works in the case of pre-calculated interest, which will be calculated the same regardless of when payments are made. Make a bit more than the minimum each month: Check with your lender to determine whether they allow this kind of payment, and also how to do it. Every little bit helps in paying down the loan faster. Make extra lump-sum payments when you receive an extra bonus or tax refund You can apply it towards your car loan when it’s better spent in another place. How the principal amount of a car loan can affect your credit rating Paying down a car loan might appear to be a great option at first. But paying off your loan earlier, particularly in the short term can . In the short term your score could fall by a few percentage points, but over the long run you could see it improve if you have a high debt-to-income ratio. Other factors, including your credit score and the history of your payments, could influence your score. To determine whether paying off your car loan early is the best option for you, consider your credit mix: Paying your auto loan off earlier shows lenders you can manage your debt effectively. But your credit score -that is, the different credit accounts you have like the car loan, credit cards and more — may be affected when the car loan is your sole installment loan. Your payments history If you’re able to pay off your car loan early can reduce the number of payments that you make regularly, but it’s not having as big of an impact on your credit score as revolving debt. Your debt-to-income ratio: Your debt to income ratio is another important aspect that determines the amount of debt you have compared to your income. The process of paying down a car loan can boost the DTI ratio and increase your credit score in the long run. How can you lower your monthly car payment If your goal is to get a principal-only loan, it will not help, as it does not reduce your minimum monthly payment. But, there are couple of ways to reduce the cost of your car. Refinance If your credit has improved or you find an attractive interest rate could aid in paying off the loan faster. When you refinance your auto loan You take out the new loan with a different lender to pay your existing loan off. This means it’s important to shop around and find the best deal possible to lower the overall price of the loan and your monthly payment. Modify your loan It is also possible to talk with your current lender regarding . Your lender may be willing to change the terms that apply to your loan for the purpose of making the monthly payments affordable. One method to accomplish this is to extend your loan period. However, this will result in paying more interest over the course of time. Sell or trade your car Another way to lower the amount you pay is to go to a lower cost car. Trade in your current car or selling it privately could help you get the money you need for a down payment. From there you can find an automobile that is more suitable for your budget and shop around for the most affordable car loan available. The main thing to consider is paying down the principal amount on your car loan could be a smart method to increase your equity. If your lender accepts the possibility of additional payments to your principal, you may make one anytime you want. Find out more
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Written by
This article was written by using automated technology. It was then thoroughly verified and edited by an editor on our editorial staff.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since late 2021. They are dedicated to helping their readers gain the confidence to manage their finances by providing concise, well-studied and well-researched content that break down complex topics into manageable bites.
Auto loans editor
Reviewed by Mark Kantrowtiz Reviewed by Nationally acknowledged student financial aid expert
Mark Kantrowitz is an expert on student financial aid including the FAFSA and scholarships, 529 plans, education tax benefits and student loans.
Nationally anerkannt student financial aid expert
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