Think of the possibility of repaying a debt earlier than the predetermined term. It might be surprising, but it could happen if you can opt for principal-only payments. But how to make principal-only payments? How open will your lender be in this case? Here are some necessary pointers for you to be aware of if you want to know more about principal-only car payments.
Key Takeaways
The loan principal is basically the amount that you borrow to finance your car. Which covers the car's price, dealer fees, and tax, title, and licensing fees. When purchasing a car, you can reduce the loan's principal by:
The principal is only a portion of your payment. Another is the annual percentage rate (APR). It includes the interest rate and any other fees associated with the loan. Your monthly car payment will include both principal and interest.
During the beginning of the loan tenure, more interest will be paid than the principal. Over time, the focus goes on the principal balance. The final few payments will consist primarily of principal, with little remaining interest.
A principal-only car payment is a type of payment that exclusively goes toward the principal balance of your auto loan. This additional payment is intended to speed up debt repayment. Every payment that is applied solely to the principal balance increases your equity. You get closer to outright ownership as you accumulate equity in your vehicle. It also reduces the risk of being upside-down on loan or owing more than the vehicle is worth.
Most auto loans are loans with simple interest. The payment is fixed throughout the loan's duration. However, the monthly payment amount for principal and interest will fluctuate. Interest is calculated on a monthly basis, so if you pay off the principal ahead of schedule, the quantity of interest will decrease as well.
Your lender may have provided you with an amortization schedule detailing the principal and interest for each payment. Use the amortization schedule or the car affordability calculator to determine the amount of interest you could save.
Ask your lender how excess payments will be handled. Some lenders will apply them to the following payment unless you specifically request a principal reduction. In this case, you may owe less on the following month's payment, but you may or may not reduce the principal balance more quickly. Some lenders have special procedures for payments of principal only.
The interest on a loan with precalculated interest is computed at the commencement of the loan. It will not change if an additional principal is paid. Ensure you understand the type of loan you have before making extra payments.
Simply put, paying extra on your auto loan allows you to save money. By paying toward the principal, you will save interest costs over the term of the loan. If you plan to sell or trade your vehicle, you may wish to pay off your auto loan as quickly as possible to accumulate equity. Alternatively, you can use the funds for something else. But paying more on the principal is not a good idea if you have 0% or 0.9% financing.
Before making additional payments, discuss their principal-only payment policies with your lender. Some lenders have their own methods or payment portals for additional principal payments. And your account must be current. Any additional payment will be applied to keep you up if you are behind on your payments. Here are some pointers for you if you wish to pay off your auto loan fast:
Lump-sum:Go for a lump-sum payment if you have received a bonus at work or an unexpected windfall. It is always better to talk to your lender to figure out your final repayment amount.
Bi-monthly:Make your regularly scheduled payment, plus an additional half-payment or more every two weeks.
Round up:Increase your payment to the nearest whole dollar. Consider increasing your payment to $400 or $450 if it's currently 365.82 dollars. These minor overpayments will reduce the principal balance.
Extra payments:Make one additional payment per year or at least once throughout the duration of the loan.
Fool the schedule:If your loan term is 72 months, with the help of an auto loan calculator to determine the monthly payment for a 60-month loan. You will have the lower payment of the 72-month loan as a backup, so if you are unable to make the extra payment one month, you can still remain current by making the lower payment of your 72-month loan.
Principal-only car payments can be advantageous in multiple ways.
Shorter loan terms
By contributing more money to the principal, you can typically pay off the balance faster and shorten the duration of the loan.
Less interest
Paying only the principal can reduce the total interest paid on loan. When you pay down your loan balance, the interest you will be asked to pay also goes down.
Principal-only car payments are not always helpful. It greatly depends on your loan terms and financial situation for principal-only payments to make sense. Here are some factors to consider.
Prepayment penalties
Some lenders may charge a prepayment penalty to recoup a portion of the interest they had anticipated collecting from you over the entire term of the loan if you repay the loan early. However, a prepayment penalty may apply if the entire principal balance is paid off early or if a substantial component of the loan is paid at once. Occasionally making principal-only payments may not incur a prepayment penalty. Confirm with your lender whether your loan has a prepayment penalty and, if so, how it applies to your specific loan.
Higher-interest debt
If you have other, higher-interest debt, such as credit card debt, it may make more sense to pay off it before making principal-only payments on a personal or auto loan with a lower interest rate. This could result in interest savings.
Refinancing your auto loan makes more sense in certain instances than making principal-only payments. Like:
You prefer a loan with a shorter term
A shorter loan tenure can reduce interest costs. Your monthly payment will increase, but you will pay less overall interest. Your automobile will also be paid off sooner.
| Lender | RefiJet | Ally | RateGenius |
|---|---|---|---|
| Minimum Credit Score | 550 | 520 | 550 |
| Estimate APR | 3.39-22.00% | 7.54-22.49% | 3.99-21.00% |
| Loan amount | $5,000-$100,000 | $7,500-$99,999 | $8,000-no max. |
You want a lower interest rate
If your credit score has increased since you initially obtained the auto loan, you may be eligible for a lower APR. If you already have a 60-month loan, you could refinance into a 48-month loan at a reduced rate of interest.
Paying off your loan early, particularly in the short term, can negatively impact your credit. If you have a high debt-to-income ratio, your score may decline a few points in the short term, but it may improve in the long run. Other factors, such as your credit mix and payment history, can also influence your credit score. Consider the following to determine whether paying off your auto loan early is in your best interest:
Your credit mix: Paying off your auto loan early proves that you can effectively manage debt to the lenders. But your credit mix may suffer if you only have an auto loan.
Your payment history: Reducing the number of regular payments by repaying a vehicle loan is not as significant as reducing current debt.
Your DTI ratio: Another essential factor is your debt-to-income ratio, which compares the amount of debt you have to your income. In the long run, paying down a car loan may enhance your DTI ratio and credit score.
Principal-only car payments can be an effective method for building equity. If your lender permits additional principal payments, you are free to make one whenever you wish. The deciding factor is whether principal-only payments make sense for your financial situation; you will need to review your loan documents or contact your lender to confirm whether and how they take principal-only payments. Lastly, if you decide to proceed with principal-only payments, be sure to review your loan statements and verify that payments are being applied accurately.
A prepayment penalty may be imposed by the lender, which will deplete your savings. Paying off a loan early could have an effect on your credit score, as any significant change to your credit history can result in a steep slope. In addition, if your loan's annual percentage rate (APR) is low, you may prefer to keep your excess funds for other uses.
Yes. It is preferable to pay down the principal to reduce the interest paid on a car loan with straightforward interest.
Large principal payments will not cut your monthly payments unless you refinance. Check with your lender to discover if excess payments are applied to next month's payment or contribute toward principal reduction. If you make more principal payments while keeping the loan until its term is through, your total payment may be reduced.
Extra payments on your auto loan principal will not reduce your monthly payment, but there are other advantages. Paying on the principal lowers the loan sum faster, allowing you to pay off the loan sooner and saving you money.