Universidade Federal do Ceará
Departamento de Química Orgânica e Inorgânica

Paying on the principal reduces the loan balance faster, helps you pay off the loan sooner and saves you money. The car loan agreement outlines the contractual framework governing how payments are processed, including any provisions for additional payments. Borrowers should review sections pertaining to prepayment, which define whether any fees are assessed for paying off the loan early or for making extra payments. These penalties, if present, are typically outlined in the contract and can sometimes be a percentage of the outstanding balance, often around 2 percent. When financing a vehicle, many individuals consider how monthly payments contribute to the overall cost. A common question is whether payments can specifically target the outstanding principal balance of a car loan.

During the initial phase of a car loan, a larger proportion of each payment is allocated to interest, with a smaller portion going towards reducing the principal balance. As the loan term progresses, this allocation gradually shifts, with an increasing share applied to the principal while the interest portion decreases. This structure means that in the early stages, even small extra principal payments can have a notable effect. The primary financial impact of these extra payments is a reduction in the total interest paid over the life of the loan.

What Is a Principal Payment on a Car Loan?

Say, for example, an auto loan is $700 per month, a borrower may opt to make bi-weekly payments of $400. Those bi-weekly payments add up to $800 per month, resulting in an extra $100 per month that only goes toward the principal. Trimming your principal will help you get out of debt sooner. Making the minimum monthly payment will get you to a debt-free car at the end of the loan’s term, but it’s possible to get out of your loan a few months or years earlier.

Understanding Car Loans

Shannon Bradley is a NerdWallet authority on autos and home services. Before joining NerdWallet in 2021, Shannon spent 30-plus years as a writer, content manager and marketer in the financial services industry. In these roles, she developed financial expertise and created educational content covering a wide range of personal and business topics.

• Second, accelerating the reduction of the principal shortens the loan term.
• For a comprehensive overview, request an updated amortization schedule from your lender.
• Paying down the principal faster also builds equity in the vehicle more quickly, which can be advantageous for a future trade-in or sale.
• Making additional payments on your next auto loan won’t instantly lower your total amount owed or cut down on interest.
• When a borrower wishes to make an additional payment towards the principal balance, clear communication with the lender is crucial.
• You can choose a different loan term and possibly qualify for a lower rate, providing an opportunity to adjust your monthly car payment.

It is typically expressed as an annual percentage rate (APR) and is calculated based on the outstanding principal balance. Most car loans use a simple interest calculation, meaning interest accrues only on the remaining principal balance, not on previously accumulated interest. When you make monthly payments on your lender’s schedule, the interest gets tacked onto the total loan. But making principal payments beyond the minimum monthly payments lets you make interest-free payments.

Benefits of paying the principal on a car loan

To ensure any additional funds are correctly applied to your car loan’s principal balance, direct communication with your lender is important. Begin by contacting your loan servicer, which can typically be done via phone, through their online portal, or by mail. Having your loan account number readily available will facilitate the process. It is important to confirm their specific procedures for making principal-only payments.

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You can also opt to make bi-weekly payments of $700 instead of monthly payments of $700 if you have the funds to make that decision. Bi-weekly payments give interest less time to compound and can put you ahead on your loan. You could consider refinancing your existing car loan to lower the payment.

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When you get a loan, your monthly payments primarily consist of principal and interest. As a general rule, making extra payments just toward the principal balance can help you pay off a loan faster and reduce the overall cost of the loan. Whether you choose to make extra payments or explore refinancing, the key is to be proactive and strategic with your car loan. By understanding how car loan payments work and exploring your options, you can make informed decisions that save you money and get you out of debt faster. Many lenders offer online account portals where borrowers can access their payment history and current loan balance in real-time.

“The key is to figure out the right level of debt for you,” Winston says. But if you have debt you want or need to tackle, there are ways to make measurable progress. That progress may equal paying down some debt, or getting rid of it entirely. Follow these steps to find the strategy that works best for you. The most common funding option, Simple Interest Auto Loans, calculates interest as a percentage of the general principal you owe. Our partners cannot pay us to guarantee favorable reviews of their products or services.

Inquire about their specific policies for designating extra payments solely to the principal. Ask if they accept principal-only payments and what methods are available for doing so, such as online portal options, phone instructions, or mailing specific forms. Confirming their process ensures your extra funds are applied as intended. To pay off the principal on a car loan, consider refinancing, making biweekly or rounded-up payments, or applying extra money as a lump sum. Another option is to continue making monthly payments and opt out of unnecessary add-ons to save on interest. By understanding how to effectively pay on the principal of your car loan, you can potentially shorten the loan term and minimize the interest paid over time.

• A change in financial status may alter your payment capability.
• The principal in a car loan refers to the original amount of money borrowed from the lender to buy the vehicle.
• Since refinancing starts a new loan, you should shop several refinance lenders to compare and find the loan that saves you the most money.
• This reduction in accrued interest directly translates into a lower total cost for the vehicle.
• Over time, as you pay down the principal, you owe less interest each month, because your loan balance is lower.

This structure is designed to ensure consistent payments over the life of the loan. While this may sound like a pipe dream, more frequent principal payments can turn that goal into a reality. Getting rid of the loan sooner frees up your monthly budget for other expenses.

This statement should clearly show the breakdown of the payment, indicating the portion applied to principal and how the outstanding principal balance has been adjusted. Some lenders may also provide an immediate confirmation email or receipt for online payments, detailing the application. To pay off the principal of your car loan, there are several methods you can use.

This translates into paying less interest overall in the long run and, as you said, paying off your loan early. However, you need to make sure that your lender doesn’t charge any prepayment penalties. To ensure an extra payment applies solely to the principal, borrowers often need to designate their intent. This can be done through online payment portals, which may offer a specific option or checkbox for principal-only payments.

Can you pay off a 72 month car loan early?

You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements. Unsure how to trim your budget to put even more toward debt? Here is a list of our partners and here’s how we make money.

However, the process of paying your car off is not as easy as sending a few extra loan payments. First off, the type of interest you have (whether simple or precomputed) matters. If you buy a home priced at $255,000, for example, and put down a 20% down payment ($55,000), you’ll need a mortgage worth $200,000. You’ll then pay off that balance monthly for the rest of your loan term — which can be 30 years for many homebuyers. This ensures you never miss a payment toward your principal. Once you pay off a paying the principal on a car loan car loan, you may actually see a small drop in your credit score.