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3 minutes read. Published September 27, 2022
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Mark Kantrowitz is an expert on student financial aid, the FAFSA as well as 529 plans, scholarships, education tax benefits and student loans.
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The process of paying down the principal of your car loan could be a smart option to rapidly build equity in your car. Often you need to specify that to your lender that the loan payment is intended to only go to the principal. This can be done through the internet or over the phone. Each lender uses its own method but they may not accept payments made solely for principal. What is a primary-only car payment? A principal-only car payment is a loan payment that is exclusively towards the principal balance of your loan and is distinct from the regular monthly installment. Principal is simply the amount that you borrowed initially, but without any interest added. The goal of this extra payment is to accelerate your repayment of the loan. Each payment made only to your principal will build equity in your vehicle. When you accumulate equity in your vehicle, you get closer to owning it outright. It also reduces the risk of owing more than your vehicle is worth. It is which is also known as getting on the loan. How do you pay off the principal amount on a car loan Making a principal-only payment on your vehicle is a great way to pay off your debt faster. Although it's not the same for all lenders, you will likely have to notify the lender that this payment is made to pay the principal amount only, and not an early payment for the following installment. Make sure to check with your lender to determine if it allows this type of payment and how you can make one. If you lender doesn't allow you to make a principal-only loan but you could still be able to pay your loan more quickly. How to pay down 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 . Be sure to ensure that your lender does not charge you prior to making additional payments. Schedule biweekly payments If you don't have enough money to pay for a complete payment twice a month but making an equal amount every week will reduce the total amount of interest you pay based on how it's calculated. This only works out if it is an interest rate that is precomputed, since it will be calculated the same regardless of when payments are made. Pay a little more than the minimum amount each month: Check with your lender to determine whether it is able to accept this kind of payment and how to go about making one. Every bit of extra money helps in paying down the loan quicker. Make extra lump-sum payments in the event of a bonus or tax refund or tax refund, you can use it towards your car loan in the event that it is better put somewhere else. How the principal amount on a car loan impacts your credit score Paying down a car loan might seem like a good idea initially. But paying off your loan early, especially in the short term could have a negative impact on your credit score . In the short run your score could fall by a few percentage points, but over the long haul you could see it increase if you have high ratio of debt to income. Other factors, including your credit score and payment history, can also impact your score. To help determine whether paying on your auto loan earlier is the right choice for you, take a look at the following: Your credit mix: Paying your auto loan off early shows lenders you can manage your debt in a responsible manner. But your credit score -- the variety of credit accounts you have, such as credit cards, a car loan, credit cards and many more -- could be affected when your car loan is your sole installment loan. Your payment history: Paying off a car loan early reduces the number of regular payments, but it's not as significant of an impact as revolving debt. Your ratio of debt-to income: Your debt-to earnings ratio is a different aspect that determines the amount of debt you have compared to your earnings. The process of paying down a car loan can improve the DTI ratio and help to improve your credit score over time. How to reduce your monthly car payment If your goal is to , a principal-only payment won't help, since it won't lower your minimum payment. There are however a couple of ways to reduce your monthly car payments. Refinance If your credit has improved or you have an interest rate that is better, can and potentially aid in paying off the loan faster. When you refinance your auto loan you get an entirely new loan from an alternative lender to pay off your present loan off. This is why it's crucial to look around for the best price to cut down the total price of the loan and monthly payments. Modify your loan It is also possible to talk to your current lender about . Your lender might be willing to alter the terms for your loan so that you can make your monthly payments affordable. One way to do this is by increasing your loan duration. But doing so will mean paying more interest in the long run. Sell or trade your car Another option to reduce the cost of your loan is to move into a less expensive car. Trading in your current vehicle and/or selling your car privately can help you get the money you need for a down payment. You can then find the right car to fit your budget, and then shop for the best auto loan available. The final point is that paying down the principal of your car loan could be a smart way to build equity. If your lender accepts extra principal installments, then you are able to make them at any time you'd like. Learn more
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Written by
This article was generated with the help of automation technology, and then verified and edited by an editor on 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 passionate about helping readers feel confident to manage their finances by providing precise, well-studied information that breaks down otherwise 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 and 529 plans, scholarships as well as tax benefits for education and student loans.
Nationally acknowledged expert in student financial aid
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