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3 minutes read. Published September 27, 2022
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Paying down the principal on your car loan can be a good option to rapidly build equity in your car. Often you need to specify that to your lender that the money is to be made only to the principal, whether through the internet or over the phone. Each lender has their own procedure, though, and some do not allow principal-only payments. What is a principal-only car payment? A principal-only car loan is a type of payment that goes only towards the balance principal of the car loan and is separate from the regular monthly installment. It is the principal amount you borrowed initially, but without any interest added. The purpose of this additional payment is to help speed up payment of the debt. Every payment that goes exclusively to the principal amount builds equity in your vehicle. When you accumulate equity in your car you are closer to owning it for the first time. Also, it reduces the possibility of having to repay more than your car is worth. It is also called having to pay for the loan. How do you pay off the principal on a car loan The principal-only option on your car is a great way to pay off your loan faster. Although it's not available for all lenders, you'll likely have to notify the lender that this payment is made for the principal balance only, not an earlier payment for the following installment. Contact your lender to determine whether they allow this kind of payment, and then make one. If you lender does not offer the option to pay in principal only however, you might be able to pay down your loan quicker. How do you pay off your car loan quicker If you aren't able to pay in principal-only installments however, you might be able to still get rid of your auto loan . Make sure your lender doesn't charge before making additional payments. Make biweekly installments: You may not have enough money to pay a full amount every month, but an equal amount every week can cut down on the amount of interest that is paid based the method of calculation. This only works out in the case of a , as precomputed interest will be applied the same regardless of the date when the payment is made. Make a bit more than the minimum each month: Check with your lender to find out whether it is able to accept this kind of payment and how to do it. Every little bit helps when it comes to 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 car loan when it's better spent in another place. What happens when you pay down the principal of the car loan affects your credit Paying down a car loan might seem like a good idea initially. But paying down your loan earlier, particularly in the short-term, can . In the short run, your score may decrease by a few points, but in the long run it may improve if you have an excessive debt-to-income ratio. Other factors, such as your credit mix and payment history, can also affect your score. To determine if the idea of paying the car loan early is right for you, think about your credit mix: Paying your auto loan off earlier shows lenders you are able to manage your debt well. But your credit score -the various credit accounts you have, such as a car loan as well as credit cards and more -- may suffer in the event that your car loan is the only installment loan. Your payment history If you're able to pay off your car loan early reduces the number of regular payments, but it's not as significant of an impact on your credit score as revolving debt. Your debt-to-income ratio: Your debt to income ratio is another crucial aspect that determines the amount of you owe in comparison to your earnings. Making a payment on the balance of your car loan can boost the DTI ratio and increase your credit score in the long run. How can you lower your monthly car payments If your goal is to get a principal-only loan, it won't help, since it does not reduce your minimum monthly payment. There are however a few ways to lower your monthly car payment. Refinance If your credit has improved or you have an interest rate that is better, can and potentially help you pay it off more quickly. If you decide to refinance your car loan, you take out an entirely new loan with an alternative lender to pay off your existing loan off. This is why it's crucial to look around for the best deal possible to reduce the total amount of your loan and your monthly payments. Modify your loan You may also speak to your current lender about . Your lender may be willing to modify the conditions of your loan so that you can make your monthly payments affordable. One way to do this is by extending your loan duration. But doing so will mean paying more interest in the long run. Trade or sell your car Another option to reduce the cost of your loan is to move into a less expensive car. Trade in your current car or selling it privately could get you the funds for a down payment. You can then find an automobile that is more suitable for your budget and search for the most affordable automobile loan available. The main thing to consider is paying down the principal amount on your car loan could be a smart way to build equity. If your lender accepts additional principal payments, you may make them at any time you'd like. Find out more
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Written by
This article was generated by using automated technology. It was then thoroughly 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 since the end of 2021. They are committed to helping readers gain the confidence to control their finances by providing precise, well-studied information that breaks down otherwise complex topics into digestible chunks.
Auto loans editor
Review by Mark Kantrowtziz. Reviewed by Nationally recognized student financial aid expert
Mark Kantrowitz is an expert on student financial aid The FAFSA as well as scholarships, 529 plans educational tax benefits, student loans.
Nationally recognized student financial aid expert
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