If you have a budget, it’s a good idea to pay only the principal on a car loan. Additional payments will help you build stocks, save interest on your loans, and pay back your car loans faster.
Make sure you allocate additional payments in the most money-saving way. If the lender doesn’t apply additional payments to the principal, you won’t make much profit, but there’s no problem with getting ahead of your monthly payments.
What is payment for a principal-only vehicle?
If the minimum monthly payment is exceeded, we will pay for a vehicle exclusively for principal. All lenders handle it differently, but in many cases you will need to specify how additional payments will be applied.
For principal-only payments, additional funds must be applied directly to the principal. If you are unsure of what your lender’s policy is, please check your loan agreement or contact customer support to determine how additional payments apply.
How to pay only principal
Before making a principal-only payment, check with the lender to allow or charge a prepayment penalty. While some lenders may automatically apply payments to the principal, monthly car loan payments are usually split into principal balances, cumulative interest, and fees. Lenders may also apply extra funds to payments next month, but that won’t reduce your principal.
The lender may need to notify the principal when making additional payments. This may require you to choose the principal only option when making payments online, but the lender may need to make this request in writing.
You could potentially be able to pay off your loan faster, even if your lender doesn’t offer the option to make a principal-only payment.
Benefits of paying additional principal
A smaller principal means lower interest and faster payoff days. All payments that only face the principal will build stocks in your car.
The most common funding option, Simple Interest Auto Loans, calculates interest as a percentage of the general principal you owe. Reducing the main amount will reduce interest.
The main advantage is saving money in the long term, so you can use an early payoff calculator to see how you reduce the total interest your monthly payments are paid and the time spent on loan payments.
Get a $42,000 car loan with a 6.35% APR and a 60-month term. By paying a small extra monthly fee, you can save hundreds of interest and get a few months off from the loan term.
| Additional monthly principal payments only | Total interest paid | Total cost | Loan period reduction |
|---|---|---|---|
| $0 | $7,130 | $0 | 0 months |
| $50 | $6,638 | $492 | 4 months |
| $100 | $6,211 | $919 | 7 months |
How to pay off your car loan faster
Even if you cannot pay just the principal, you may be able to repay your car loan as planned.
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Schedule biweekly payments: You may not have the money to make the full payment twice a month, but paying half of it every other week can reduce your overall interest.
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Pay more than your minimum. Similarly, you might be able to combine your payments into the closest 100 people. It can help even a little bit if you end up paying off your loan faster.
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Make an extra lump payment: If you receive a bonus or tax refund, you can direct it to a car loan if it is better to use it elsewhere.
Conclusion
Paying principal alone is an effective way to save money and manage your car loan. Contact your lender to see if you want to apply the payment directly to the principal. If it’s an option, make sure you know how to notify your lender.
Remember that every bit is important when it comes to paying off your loan. Adding additional payments to your regular monthly payments will help you pay off your loan faster.
