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3 min read published September 27 2022
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Paying down the principal on your car loan can be a good way to quickly build equity in your car. Usually, you will need to indicate to the lender that the loan payment is intended to only go to the principal. This can be done online or over the phone. Each lender has its own process but they may not accept payments made solely for principal. What is a primary-only car payment? A principal-only vehicle payment is a loan payment that is exclusively towards the balance principal of the car loan and is not part of the regular monthly installment. It is the principal amount you borrowed initially, but with no interest added. The purpose of this additional payment is to speed up the repayment of the debt. Each payment made only to your principal will build equity in your vehicle. When you accumulate equity in your car, you get closer to owning it for the first time. Also, it reduces the possibility of having to pay more than the car is worth. It is also called getting on the loan. How do you pay off the principal amount on a car loan The principal-only option on your car is a good way to pay off your debt faster. Although it's not available for every lender, you'll likely have to notify the lender that the payment is to pay the principal amount only, not an earlier payment for the following installment. Contact your lender to determine whether they allow this kind of payment and how to make one. If your lender doesn't allow you to make a principal-only payment, you may still be able to settle your loan faster. How to pay down your car loan quicker If you aren't able to make principal-only payments however, you might still be able pay off your car loan . Make sure your lender doesn't charge before making any additional payments. Make biweekly installments There's a chance that you won't have enough funds to pay a full amount every month but an equal amount every week can cut down on the total amount of interest you pay based on the way it's calculated. This only works out when it's an interest rate that is precomputed, since it is calculated in the same way regardless of when payments are made. Pay a little more than your minimum payment each month: Check with your lender to see whether it is able to accept this kind of payment and how you can do it. Every little bit counts in paying down the loan faster. Make extra lump-sum payments: If you get an extra bonus or tax refund, you can put it towards your vehicle loan when it's better put elsewhere. How the principal amount on the car loan can affect your credit rating A car loan could seem like a good idea initially. But paying off your loan early, especially in the short term, can . In the short term, your score may decrease by a few points, but over the long run, it could improve if you've got an excessive debt-to-income ratio. Other factors, including your credit score and payment history, can also affect your score. To determine whether you should pay on your auto loan earlier is the right choice for you, think about the followingfactors: Your credit score: Paying off your auto loan off earlier shows lenders you are able to manage your debt well. But your credit mix -the various credit accounts you hold including a car loan as well as credit cards and many more -- could suffer in the event that your car loan is the only installment loan. Your credit history If you're able to pay off your car loan early reduces the number of payments that you make regularly, but it's not having as big of an impact as revolving loans. Your ratio of debt-to income: Your debt-to earnings ratio is a different factor that considers how much debt you owe compared to your earnings. The process of paying down a car loan may improve your DTI ratio and increase your credit score in the long run. How to lower your monthly car payments If your goal is to pay in full, a payment that is solely for principal isn't going to help since it won't lower your minimum payment. But, there are couple of ways to reduce your monthly car payments. Refinance your loan if your credit has improved or you find an interest rate that is better could assist you in repaying it faster. When you refinance your automobile loan, you take out a 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 amount of your loan and monthly payments. Modify your loan You can also talk to your current lender about . Your lender may be willing to alter the terms for your loan for the purpose of making the monthly payments more affordable. One way it can do this is to extend the loan duration. But , doing this could mean paying more interest over the course of time. Sell or trade your car Another option to reduce the amount you pay is to go to a lower cost vehicle. Selling your car or selling it privately will provide you with the money needed for a downpayment. Then, you can locate an automobile that is more suitable for your budget and search for the most affordable car loan available. The main thing to consider is paying down the principal amount on your vehicle loan is a great option to build equity. If your lender will accept extra principal installments, then you may pay them whenever you like. Find out more
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Written by
This article was generated with the help of automation technology, and then checked for accuracy and editing by an editor on our editorial staff.
The edit was done by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate from late 2021. They are committed to helping readers feel confident to take control of their finances through providing concise, well-studied and well-researched content that breaks down complicated subjects into bite-sized pieces.
Auto loans editor
Review by Mark Kantrowtziz. Reviewed by Nationally known Student Financial Aid expert
Mark Kantrowitz is an expert on student financial aid including the FAFSA, scholarships, 529 plans educational tax benefits, student loans.
Nationally anerkannt student financial aid expert
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