The less you owe on your car loan (the principal), the less you’ll pay in interest. By making an additional payment on the principal, you can shorten your loan and save money.
But if you pay extra on your car loan, does it go to the principal automatically? Not always, so be sure to check.
Here’s what you need to know about how to pay towards the principal on a car loan and when it’s a good idea.
When it comes to any type of auto loan , most of the car payment usually goes to pay fees and interest first, while the principal balance — the amount you actually borrowed to buy your car, including dealer’s fees — gets paid down more slowly.
But if you make an extra “principal-only payment,” it will go entirely toward the principal. A lower principal balance means lower interest payments, helping you pay off your car loan early .
Extra payments made on your car loan usually go toward the principal balance, but you’ll want to make sure.
Some lenders might instead apply the extra money to future payments, including the interest, which is not what you want. Check with your lender or review your loan statement to be certain any extra payments are applied correctly.
Making a principal-only payment is a key to paying off your car loan faster . You have a few options on how to find this extra money for principal-only payments:
Paying the principal of a loan directly cuts down the amount you owe. As mentioned above, the less principal remains, the lower the interest payments, so paying down the principal reduces the overall cost of the loan.
Paying interest, on the other hand, has no effect on the principal and doesn’t lower future interest payments.
Keep in mind that at the start of the loan, most of your payments are usually going toward interest, with the size of the principal payment rising slowly. For this reason, principal-only payments can be very effective early in the loan.
If you have a $745.72 payment for 60 months at 4.5% interest, here’s what your first and last payments would look like:
Making extra payments is a good way to lower your car payments and repay your loan faster, but so is auto loan refinancing.
When choosing between the two, you’ll want to look at how much cash you have for extra payments and what kind of interest rate you can get if you refinance.
If you can find a car loan refinance rate significantly lower than your current loan rate, refinancing might be the better choice.
Try our auto loan refinance calculator to compare your current payments with refi loan offers you find online.
Extra car payments generally go toward reducing the principal, but you should check. If you decide to make additional payments, it’s important to confirm with your lender that they are applied correctly.
If you can afford to make extra payments on your car loan, it’s a smart move. Doing so allows you to pay down your principal balance faster and save on interest.
The only time it might not be such a good idea is if you have higher-interest debt (maybe credit cards, for example). In that case, paying extra on your higher-interest loans will save more than paying extra on your car.
The portion of your car payment that goes toward the principal varies based on your loan balance and interest rate.
Initially, a larger portion of your payment goes toward interest, but as you reduce the balance, more of your payment will apply to the principal. ( See more above .)