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3 min read Published September 27, 2022
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Repaying the principal amount on your car loan is a great method to build equity in your car. In most cases, you must indicate that to your lender that the payment is intended to only go to the principal. This can be done via the internet or by phone. Each lender uses its own method, though, and some do not allow principal-only payments. What is a principal-only car payment? A principal-only car payment is a type of payment that goes solely toward the balance principal of the car loan and is distinct from your normal monthly payment. It is the principal amount you initially borrowed, with no interest added. The goal of this extra payment is to speed up the your repayment of the loan. Every payment that goes solely toward your principal builds equity in your vehicle. As you build equity in your vehicle you are closer to owning it outright. Also, it reduces the possibility of having to repay more than your car is worth — or getting on the loan. How to pay off the principal amount on an auto loan A principal-only installment on your car is a great way to pay off your debt more quickly. While it’s not the same for every lender, you’ll likely need to directly notify the lender that your payment is to pay the principal amount only, and not an early payment for the following installment. Contact your lender to see if it allows this type of payment and how you can make one. If you lender doesn’t offer the option to make a principal-only payment, you may still be able to settle your loan faster. How can you pay off your car loan faster If you’re not able to make principal-only payments however, you might still be able make payments towards your vehicle loan . Just make sure that your lender does not charge you prior to making additional payments. Schedule biweekly payments There’s a chance that you won’t have enough money to make a whole payment every month, but one half-payment every other week could reduce the amount of interest that is paid based on the way it’s calculated. It only works in the case of a , as precomputed interest will be calculated the same regardless of the date when the payment is made. Pay a little more than the minimum amount every month: Contact your lender to find out whether they allow this kind of payment, and also how to make it. Every little bit counts in paying down the loan faster. Make extra lump-sum payments when you receive an extra bonus or tax refund, you can put it towards your vehicle loan if it wouldn’t be better put somewhere else. How the principal amount on the car loan impacts your credit score Paying down a car loan could seem like a good option at first. But paying down your loan earlier, particularly in the short term can . In the short term your score might fall by a few percentage points, but over the long haul you could see it increase if you have an excessive debt-to-income ratio. Other factors, like your credit history and your the history of your payments, could affect your score. To determine if you should pay off your car loan early is right for you, think about your credit mix: Paying your auto loan early will show lenders that you can manage your debt in a responsible manner. However, your credit mix- the variety of credit accounts you have like the car loan or credit card, and more — may take a hit in the event that the car loan is the only installment loan. Your payment 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 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. Paying down the balance of your car loan can boost the DTI ratio and increase your credit score in the long run. How to lower your monthly car payment If you’re looking to get a principal-only loan, it isn’t going to help since it doesn’t reduce the minimum amount you pay. There are however a several options to reduce the cost of your car. Refinance your loan if your credit has improved or you find a better interest rate it could be a way to help you pay it off more quickly. If you decide to refinance your car loan you get the new loan from another lender to pay your current loan off. This means it’s important to look around for the most affordable deal to cut down the total cost of your loan and monthly payments. Modify your loan It is also possible to talk with your current lender about . Your lender might be willing to alter the terms of your loan in order to make your monthly payments less expensive. One way to do this is to extend your loan term. But doing so will mean paying more interest over the long term. Sell or trade your car Another way to lower your payment is to get to a lower cost vehicle. Selling your car or selling it privately could get you the funds for a downpayment. Then, you can locate an automobile that is more suitable for your budget and search for the best auto loan available. The main thing to consider is paying down the principal of your vehicle loan could be a smart option to build equity. If your lender accepts additional principal payments, you may pay them whenever you like. Learn more
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Written by
The article was created by using automated technology. It was then thoroughly verified and edited by an editor from our editorial team.
The edit was done by Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since the end of 2021. They are passionate about helping readers to take control of their finances by providing precise, well-studied information that breaks down complicated subjects into bite-sized pieces.
Auto loans editor
Reviewed by Mark Kantrowtiz Reviewed by Nationally recognized student financial aid expert
Mark Kantrowitz is an expert on student financial aid including the FAFSA as well as scholarships, 529 plans, education tax benefits and student loans.
Nationally acknowledged expert in student financial aid
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