Are you tired of high-interest rates on your car loan? Paying more on capital can help save you money over the life of your loan. Learn all about loan principles and how to pay them off faster. Discover how to make extra payments on the principal of your car loan and what options are available. So, please grab a cup of coffee, and let’s get started!
Trying to complete the payment of the principal amount on your car loan might seem hard. But it’s like getting up early to go to the gym: when the effects show, you’ll be glad you did it.
One of the best ways to get your finances in order is to make extra payments on the principal of your car loan. Each payment on a car loan is a mix of interest and the amount you owe. In the loan deal for your car, you should be able to determine how much interest you’ll have to pay.
You shouldn’t pay less on the loan than you agreed to, but paying more is fine. The more quickly you pay down the capital, the less interest you’ll have to pay over the life of the loan. You’ll have more money in your bank account and own your car completely sooner.
What do you mean by Loan Principal?
The amount you borrowed to buy the car is the loan principal. This number includes the price of the car, any dealer fees, and any tax, title, and license (TTL) fees you might have had to pay if you financed the car.
When you buy a car, you can bring down the loan balance by:
- Investing more money
- TTL fees are paid upfront
- When you trade in your car
- Taking advantage of incentives from the dealer or the maker
- Buying a low-cost car
One way to reduce the interest you pay on your car loan is by making principal payments. A principal payment is an additional payment that goes directly toward the amount you owe on the car loan. By strategically making principal payments, you can reduce the interest you’ll have to pay over the life of the loan.
When you make your car payment, it pays off the amount you owe and the interest rate or APR. By adding principal payments to your regular car payment, you can pay off more of the loan’s principal and reduce the interest you’ll have to pay over time.
Initially, a significant portion of your car payment will go toward interest rather than the principal amount. However, as you make more payments, the ratio will shift, and you’ll pay less interest and more of the principal amount. Eventually, only a small amount of interest will be left toward the end of the loan.
When you receive your loan paperwork, check the Truth in Lending disclosure. It will provide you with information about how much you have to pay in capital and interest over the life of the loan. By making principal payments, you can pay off your car loan early and reduce the total interest you pay.
Does Payment of the Principal Differ from Paying Interest on a Car Loan?
One way to reduce the total interest paid on your car loan is to make principal payments. As mentioned earlier, the interest charged on car loans is calculated based on the loan’s principal amount. By making additional payments towards the principal, you will lower the overall amount of interest you will pay over the life of the loan.
For example, if you strategically make larger payments towards the principal early on in the loan, you can significantly reduce the amount of interest you’ll pay later. So, it’s a good idea to review your car loan’s amortization plan and consider adding extra principal payments to pay off the loan faster and reduce the total interest paid.
For instance, if you have a payment of $900 for 60 months at 4.5% interest, your first and last payments would look like this:
- First payment: $41.85 goes to interest and $888.15 to the principal.
- Last payment: $39.96 goes to interest, and $890.04 goes to the principal.
When you pay more toward the balance, you will pay off the car loan faster and pay less interest. Because interest is based on the principal amount, it works best to pay down the principal as soon as possible.
Ask your lender what will happen if you pay more than agreed. Some lenders will put them toward the next payment if you don’t ask them to go toward the debt. In that case, you might spend less on the next month’s payment but not pay off the principal faster. Some lenders have special rules about how to pay only the debt.
If you have a loan with precalculated interest, the interest is already figured out when the loan starts. Even if you pay more capital, it will stay the same. Before making extra payments, make sure you know what kind of loan you have.
Why pay more on the Car Loan’s Principal?
The main reason to pay more on your car loan is simple: you can save money. By putting more money toward the capital, you’ll save money on interest over the life of the loan.
If you want to sell or trade in your car, you should pay off your loan faster to have more value in the car. You could also use the money for something else. But if your APR is low, like 0% or 0.9%, paying more on the capital would make little financial sense.
Accelerate Your Auto Loan Repayment with Principal-Only Payments
Before you make extra payments, you should ask your lender how to pay only the capital. Some lenders have special steps or payment sites for making extra payments on the principal. Your account must, of course, be up to date. If you need to catch up on your bills, any extra money you send will help you get caught up.
If you want to pay off your car loan faster, you can use extra money in several ways:
Pay off the entire amount or a big chunk of it all simultaneously. This is a great way to pay off a loan if you got a work bonus or some extra cash. Check with your lender to find out how much you still owe.
Make your regular payment and then pay an extra half every two weeks.
Lump sum: Round up your payment to the next whole number. For example, if your payment is $384.66, you should raise it to $420 or $450. Small overpayments like these will cut into the principal amount.
Extra Payments: Make one extra payment a year or at least one payment throughout the loan. Every little thing is important.
Don’t follow the plan: Use a car loan calculator to determine the payment on a 60-month loan if you had a 72-month loan. You’ll have the lower payment of the 72-month loan as a safety net. If you don’t have the money for the extra payment for one month, you can still pay on time by making the lower payment of your 72-month loan.
If you can always pay as if you were making a payment for 60 months, you’ll pay off your loan a year early.
Principal payments vs. Refinancing: Which saves you more?
It might sometimes make more financial sense to refinance your car loan than to pay the principal.
Refinancing your car loan might be a good idea when:
You want a shorter-term loan –
You can save money on interest if you pay off your loan faster. The amount you pay each month will go up, but you’ll pay less interest total. Also, you’ll pay off your car loan faster.
You can get a lower rate of interest –
If your credit score has increased since you first got the car loan, you could get a lower APR. You could convert a 60-month loan into a 48-month loan with a lower interest rate.
Winning plan – Which one suits you best?
Some lenders don’t let you pay down the debt, so refinancing to a loan with better terms may be the only way to pay off the car loan early. Use a car refinance calculator to figure out if what you want to do can be done by refinancing.
Check with your lender or review your loan papers to see if you will be charged a fee if you pay off your loan early. If that’s the case, paying off the loan early might not make sense. But getting a car to refinance a loan with good terms and an interest rate may be enough to cover a prepayment penalty and save you money.
If you have a simple interest loan with no prepayment penalties and the lender will let you pay down the principal, keeping your present loan and working toward paying it off early may make sense.
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