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3 min read Published September 27, 2022
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Repaying the principal amount on your car loan could be a smart option to rapidly build equity in your car. Usually, you will need to indicate your lender that the loan payment is intended to only go to the principal, whether through the internet or over the phone. Each lender uses its own method, though, and they may not accept payments made solely for principal. What is a principal-only car payment? A principal-only car loan is a payment that goes only towards the balance principal of the loan and is separate from your normal monthly payment. Principal is simply the amount that you borrowed initially, but with no additional interest. The goal of this extra payment is to accelerate your repayment of the loan. Each payment made solely toward your principal builds equity in your vehicle. As you build equity in your car, you get closer to owning it for the first time. This also lowers the chance of having to pay more than the vehicle is worth. This is or getting on the loan. How to pay off the principal on the car loan A principal-only installment on your vehicle is a great way to pay down your balance quicker. Although it’s not the same across every lender, you’ll likely need to directly notify the lender that the payment is intended for the principal balance only, not an earlier payment of the next installment. Make sure to check with your lender to find out if it allows this type of payment and how you can go about making one. If you lender doesn’t allow you to make a principal-only loan but you could still be able to pay your loan faster. How can you pay off your car loan quicker If you aren’t able to pay in principal-only installments but you could be able to still get rid of your auto loan . Make sure your lender does not charge you prior to making any additional payments. Make biweekly installments: You may not have enough money to make a whole payment every month, but an equal amount every week will reduce the total amount of interest you pay based on the way it’s calculated. This is only true when it’s an interest rate that is precomputed, since it is calculated in the same way regardless of the date when the payment is made. Make a bit more than your minimum payment each month: Check with your lender to determine if it allows this type of payment, and also how to go about making one. Every little bit counts when it comes to paying down the loan quicker. Make extra lump-sum payments when you receive the benefit of a tax refund or bonus You can apply it towards your car loan in the event that it is better put in another place. What happens when you pay down the principal of the car loan affects your credit Paying down a car loan might appear to be a great option at first. But paying off your loan early, especially in the short term, could cause . In the short-term your score could drop by a few points, but in the long term, it could improve if you’ve got high ratio of debt to income. Other factors, like your credit history and your payment history, can also impact your score. To help determine whether paying the car loan early is right for you, think about the followingfactors: Your credit profile: Paying your auto loan off earlier shows lenders you are able to manage your debt effectively. However, your credit mix- the variety of credit accounts you hold like credit cards, a car loan as well as credit cards and more — may take a hit when your car loan is the only installment loan. Your payments history When you pay off a car loan early can reduce the number of regular payments, but it’s not having as big of an impact as revolving loans. Your debt-to-income ratio: Your debt to income ratio is another important measure of how much debt you owe compared to your earnings. Making a payment on a car loan can improve the DTI ratio and improve your credit score in the long run. How to reduce your monthly car payment If your goal is to pay in full, a payment that is solely for principal isn’t going to help since it doesn’t reduce your minimum monthly payment. There are however a few ways to lower your monthly car payment. Refinance your loan if your credit has improved or you have an attractive interest rate, can and potentially help you pay it off quicker. When you refinance your automobile loan, you take out a new loan with an alternative lender to pay off your existing loan off. This is why it’s crucial to research and locate the most affordable deal to reduce the total amount of your loan and your monthly payment. Modify your loan You can also talk with your current lender regarding . Your lender may be willing modify the conditions that apply to the loan for the purpose of making monthly payments less expensive. One way to do this is by extending your loan term. But doing so will mean paying more interest in the long run. Trade or sell your car Another way to lower the amount you pay is to go into a cheaper car. Trade in your current car or selling it privately could provide you with the money needed for a downpayment. From there you can find a car that better fits your budget and search for the most affordable auto loan available. The final point is that paying down the principal amount on your vehicle loan is a great option to build equity. If your lender accepts extra principal installments, then you are able to make one anytime you want. Learn more
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Written by
This article was written with the help of automation technology, and then verified and edited by an editor from our editorial team.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since late 2021. They are committed to helping readers feel confident to take control of their finances by providing precise, well-studied information that break down complex subjects into bite-sized pieces.
Auto loans editor
Reviewed by Mark Kantrowtziz Reviewed by Nationally acknowledged Student Financial Aid expert
Mark Kantrowitz is an expert on student financial aid including the FAFSA, 529 plans, scholarships as well as tax benefits for education and student loans.
Nationally acknowledged expert in student financial aid
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