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How paying the principal affects your car loan Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial decisions by providing you with interactive financial calculators and tools, publishing original and objective content. This allows you to conduct research and compare information for free – so that you can make sound financial decisions. Bankrate has agreements with issuers, including but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The offers that appear on this website are provided by companies who pay us. This compensation could affect how and where products appear on the site, such as such things as the sequence in which they be listed within the categories of listing in the event that they are not permitted by law. This applies to our mortgage home equity, mortgage and other home lending products. However, this compensation will have no impact on the information we publish, or the reviews that you read on this site. We do not include the entire universe of businesses or financial offers that may be accessible to you.
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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 increase the equity in your car. Often you need to specify your lender that the loan payment is to be made only to the principal. This can be done via the internet or by phone. Each lender has its own process however, and not all accept principal-only payments. What is a principal-only car payment? A principal-only car payment is a payment that goes solely toward the balance principal of the loan and is distinct from the regular monthly installment. Principal is simply the sum you borrowed initially, but without any additional interest. The goal of this extra payment is to accelerate your repayment of the loan. Each payment made exclusively to the principal amount builds equity in your vehicle. As you build equity in your vehicle, you get closer to owning the car outright. This also lowers the chance of having to pay more than the car is worth. This is which is also known as getting on the loan. How to pay off the principal of the car loan Making a principal-only payment on your car is a great way to pay off your debt quicker. Although it’s not the same across every lender, you’ll likely have to notify the lender that your payment is for the principal balance only, not an earlier payment for the following installment. Contact your lender to find out whether they allow this kind of payment and how to proceed to make it. If your lender doesn’t allow you to make a principal-only loan however, you might be able to pay down your loan quicker. How can you pay off your car loan faster If you can’t make payments that are solely for principal however, you might be able to still pay off your car loan . Be sure to ensure that your lender doesn’t charge before making any additional payments. Schedule biweekly payments If you don’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 how it’s calculated. This only works out in the case of an interest rate that is precomputed, since it is calculated in the same way regardless of the date when the payment is made. Make a bit more than the minimum amount each month: Talk to your lender to see if it allows this type of payment and how to go about making one. Every bit of extra money helps when it comes to making the loan faster. Pay extra lump-sum installments: If you get an extra bonus or tax refund or tax refund, you can use it towards your vehicle loan if it wouldn’t be better spent in another place. How paying down the principal on an auto loan can affect your credit rating Paying down a car loan might appear to be a great idea at first. But paying down your loan earlier, particularly in the short term can . In the short run your score could decrease by a few points, but over the long run, it could improve if you have a high debt-to-income ratio. Other factors, like your credit history and your payment history, may impact your score. To determine whether you should pay the car loan early is the best option for you, consider the followingfactors: Your credit profile: Paying your auto loan off early shows lenders you are able to manage your debt well. However, your credit mixthe various credit accounts you have, such as a car loan or credit card, and others — could suffer in the event that the car loan is your sole installment loan. Your payment history When you pay off a car loan early reduces the number of regular payments, however 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 factor that considers how much debt you have compared to your earnings. Paying down the cost of a car loan can boost your DTI ratio and help to increase your credit score in the long run. How to reduce the cost of your car loan each month If you’re trying to pay in full, a payment that is solely for principal will not help, as it doesn’t reduce your minimum payment. There are however a few ways to lower your monthly car payments. Refinance if your credit score is improving or you can find a better interest rate could aid in paying off the loan quicker. When you refinance your automobile loan, you take out an entirely new loan with another lender to pay off your current loan off. This means it’s important to shop around and find the most affordable deal to lower the overall cost of your loan and monthly payments. Modify your loan You can also talk with your current lender regarding . Your lender may be willing to alter the terms of the loan for the purpose of making the monthly payments more affordable. One way it can do this is to extend the loan duration. However, this will result in paying more interest over the course of time. Sell or trade in your vehicle Another method to lower your payment is to get to a lower cost vehicle. Selling your car or selling it privately will help you get the money you need to make a down payment. You can then find a car that better fits your budget and search to find the most suitable car loan available. The main thing to consider is paying down the principal of your vehicle loan could be a smart option to build equity. If your lender accepts additional principal payments, you may make one anytime you want. Learn more
This article was generated with the help of automation technology, and then edited and fact-checked by an editor from our editorial staff.
The edit was done by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since late 2021. They are dedicated to helping their readers to manage their finances by providing clear, well-researched information that breaks down otherwise complex topics into manageable bites.
Auto loans editor
Reviewed by Mark Kantrowtziz Reviewed by Nationally acknowledged scholar financial aid specialist
Mark Kantrowitz is an expert on student financial aid including the FAFSA, 529 plans, scholarships as well as tax benefits for education and student loans.
Nationally acknowledged expert in student financial aid
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