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3 minutes read. Published September 27, 2022
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Repaying the principal amount on your car loan is a great way to quickly build equity in your vehicle. In most cases, you must indicate your lender that the loan payment is to be made only to the principal, either via the internet or by phone. Each lender uses its own method however, and some do not allow principal-only payments. What is a principal-only vehicle payment? A principal-only car payment is a loan payment that is only towards the principal balance of your loan and is not part of the regular monthly installment. It is the principal sum you initially borrowed, without any additional interest. The aim of this extra payment is to accelerate your repayment of the loan. Each and every payment you make that is solely toward your principal builds equity in your car. When you accumulate equity in your vehicle you are closer to owning the car outright. Also, it reduces the possibility of owing more than your vehicle is worth. This is or getting on the loan. How to pay down the principal on a car loan A principal-only installment on your car is a good way to pay down your balance faster. Although it's not available across all lenders, you'll probably need to inform the lender that this payment is made intended for the principal balance only, and not an early payment of the next installment. Check with your lender to determine whether it is able to accept this kind of payment and how to make one. If your lender doesn't offer the option to make a principal-only loan however, you might be able to settle your loan quicker. How to pay down your car loan faster If you're not able to make payments that are solely for principal however, you might be able to still make payments towards your vehicle loan . Be sure to ensure that your lender isn't charging before making any additional payments. Schedule biweekly payments If you don't have the money to pay for a complete payment every month, but an equal amount every week could reduce the overall interest paid depending on the way it's calculated. This is only true in the case of a , as precomputed interest is calculated in the same way regardless of the date when the payment is made. Pay a little more than your minimum payment each month: Talk to your lender to see whether it is able to accept this kind of payment and how to do it. Every bit of extra money helps when it comes to paying down the loan faster. Consider lump-sum payment payments in addition to your regular monthly ones in the event of an extra bonus or tax refund, you can put it towards your vehicle loan if it wouldn't be better spent somewhere else. How paying down the principal on the car loan can affect your credit rating A car loan may seem like a good idea at first. But paying off your loan quickly, particularly in the short-term, can . In the short term, your score may drop by a few points, but over the long run you could see it improve if you have an excessive debt-to-income ratio. Other factors, like your credit mix and the history of your payments, could impact your score. To determine if the idea of paying off your car loan early is the best option for you, take a look at your credit score: Paying off your auto loan early will show lenders that you are able to manage your debt well. But your credit score -the various credit accounts you have including credit cards, a car loan or credit card, and others -- could take a hit if your car loan is the only installment loan. Your payments history When you pay off a car loan early can reduce the number of payments that you make regularly, 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 crucial factor that considers how much debt you have compared to your earnings. Making a payment on the cost of a car loan can improve the DTI ratio and improve your credit score in the long run. How can you lower the cost of your car loan each month If you're looking to get a principal-only loan, it won't help, since it does not reduce your minimum payment. However, there are a few ways to lower your monthly car payment. Refinance your loan if your credit has improved or you find an attractive interest rate, can and potentially assist you in repaying it more quickly. When you refinance your auto loan You take out an entirely new loan with an alternative lender to pay off your current loan off. It is therefore important to shop around and find the best deal possible to lower the overall amount of your loan and your monthly payment. Modify your loan You may also speak with your current lender regarding . Your lender may be willing to modify the terms of the loan for the purpose of making monthly payments affordable. One way to do this is by increasing your loan duration. However, this will result in paying more interest in the long run. Sell or trade your car Another way to lower your payment is to get into a cheaper car. Trade in your current car and/or selling your car privately could get you the funds for a downpayment. You can then find an automobile that is more suitable for your budget and shop around for the best auto loan available. The bottom line Paying down the principal of your vehicle loan is a great method to increase your equity. If your lender accepts additional principal payments, you are able to pay them whenever you like. Find out more
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Written by
This article was generated by using automated technology. It was then thoroughly edited and fact-checked 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 late 2021. They are dedicated to helping their readers gain the confidence to control their finances by providing clear, well-researched information that break down complex topics into digestible chunks.
Auto loans editor
Reviewed 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, education tax benefits and student loans.
Nationally acknowledged expert in student financial aid
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