How to make principal-only payments on your car loan
Quick insights
- A principal-only payment is an extra payment applied to your loan balance when no interest is due.
- Your lender may not apply extra payments to the principal, so you might need to specify how the funds should be directed.
- Making principal-only payments can help reduce the total interest you pay and shorten the term of your loan.
When you make a car payment, part goes toward interest and part reduces what you owe. A principal-only payment bypasses the interest entirely and goes straight toward paying down your loan balance. Learning how to make these payments properly may help you save money and pay off your loan ahead of schedule.
What is a principal only car payment?
A principal-only car payment is an extra payment applied to the principal balance of your auto loan. The principal is the amount you originally borrowed from the lender, excluding interest and fees. When you make a principal-only payment, the funds reduce the balance you owe without going toward any interest charges.
Your regular monthly payment is divided between principal and interest, with a portion going toward each. A principal-only payment is a separate payment made in addition to your regular payment and is applied to the balance rather than to interest. This distinction matters because reducing the principal can help lower the amount of interest that accrues over the life of the loan.
Some lenders allow you to make principal-only payments through their online portal or mobile app. Others may require you to submit a request by phone or in writing. Checking with your lender before making a payment can help you understand the process and avoid having the funds applied to interest instead of the principal.
Principal vs. regular payment
Your regular monthly payment covers both principal and interest. At the start of the loan, a portion of your payment goes toward interest, and the remainder reduces the principal. As the loan progresses, the amount applied to principal increases while the interest portion decreases.
A principal-only payment goes toward reducing the balance you owe. Because interest is calculated based on the remaining principal, lowering the principal can reduce the interest that accrues between payments. Paying interest does not reduce the principal or lower future interest charges.
The timing of a principal-only payment can influence its impact. Payments made early in the loan term can reduce the total interest you pay because the principal balance is higher at that point. As the loan progresses and the balance decreases, the interest portion of each payment also decreases, which means the benefit of principal-only payments may be reduced later in the term.
How to make a principal-only payment
Making a principal-only payment involves steps to confirm the funds are applied to the principal.
- Check your lender's policy: Lenders vary in how they handle extra payments. Review your loan agreement or contact customer service to confirm how additional payments are processed.
- Look for prepayment penalties: Some lenders charge a fee for paying off a loan early or making extra payments. Check your loan terms to determine whether penalties apply before submitting a principal-only payment.
- Notify your lender: You may need to specify that the extra payment should go toward the principal. This could be a checkbox on your lender's website, a note in the payment portal or a request made by phone.
- Choose a payment method: You can make a lump-sum payment, set up biweekly payments or round up your monthly payment. Each approach directs extra funds toward the principal if your lender applies them as intended.
- Confirm the application: After making the payment, check your account to verify the funds were applied to the principal. If the payment was directed elsewhere, contact your lender to see if retroactively correcting the allocation is possible.
Benefits of making principal payments
Making principal-only payments can offer advantages over the life of your loan.
- Reduce total interest: Because interest is calculated on the remaining principal, lowering the principal reduces the interest that accrues. Over time, this can lower the total amount you pay for the loan.
- Shorten the loan term: By reducing the principal, you can pay off the loan earlier than the original schedule. This can free up funds for other expenses once the loan is retired.
- Build equity: Reducing the loan balance builds equity in the vehicle. This can reduce the risk of being upside down on the loan, which means owing more than the car is worth.
The bottom line
Making principal-only payments on your auto loan can help reduce the total interest you pay. Whether you choose a lump-sum payment, biweekly payments or rounding up your monthly amount, reducing the principal may help you pay off the loan and build equity in your vehicle.
