How To Pay The Principal On A Car Loan

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Over 30% of Americans use car loans to afford their vehicles, and another 14% say they plan on getting an auto loan in the future. Those figures come from a recent Finder survey and highlight the importance of auto loans. While these loans can help you buy a car, consumers have several ways to break free from monthly loan payments sooner. This article will share some tips to pay off your principal faster instead of getting stuck with more interest payments.

What does it mean to pay the principal on a car loan?

Paying the principal on a car loan means reducing how much you owe. Lenders charge interest to increase their returns, but this interest acts as a barrier that makes it more difficult to reduce your principal. Lowering your principal quicker than the traditional payment schedule can help you avoid some of the interest payments. 

Benefits of paying the principal on a car loan

Paying the principal on a car loan presents several advantages. Here are some of the benefits you get to enjoy for chipping away at the principal.

Faster car loan repayment

What if you can pay off your car loan two years early? While this may sound like a pipe dream, more frequent principal payments can turn that goal into a reality. Getting rid of the loan sooner frees up your monthly budget for other expenses. 

Save money

When you make monthly payments on your lender’s schedule, the interest gets tacked onto the total loan. But making principal payments beyond the minimum monthly payments lets you make interest-free payments. The interest rate doesn’t matter for principal-only payments. If you have a high-interest rate on your auto loan, it’s possible to save hundreds or even thousands of dollars.. 

Improve credit score

Payment history is the largest credit score category, making up 35% of this critical number. When you pay your auto loan on time, this can help raise your credit score. Making multiple payments could make you less risky for lenders and could result in lower interest rates on future loans.

Paying down principal vs. paying down interest on a car loan

Typically, every auto loan payment schedule features principal and interest payments. Paying the principal reduces your loan’s balance and gets you closer to removing the loan from your budget. More frequent principal payments speed up your path to repaying the entire loan. Interest payments represent the return banks make from incurring the risk of giving you a loan. These interest payments do not lower your principal. Making interest payments protects your balance from growing, but interest payments do not get you closer to fully paying off your vehicle.

Any fees, outstanding balances, or overdue interest will also act as a barrier that makes it more difficult to reduce your principal balance. You will have to address these expenses before making progress on your loan and getting closer to paying it off.

How to pay toward the principal on a car loan

Trimming your principal will help you get out of debt sooner. Making the minimum monthly payment will get you to a debt-free car at the end of the loan’s term, but it’s possible to get out of your loan a few months or years earlier. You can use these methods to pay off your principal faster.

Review your lender’s policies

Lenders have different policies for principal payments. You should check with your lender to make sure your excess contributions only go toward principal payments. Check with your lender before you commit to trimming the principal.

Make a lump sum principal-only payment

Did you receive a bonus from work or cash from a friend? These payouts aren’t as common as weekly paychecks, but you have extra funds that you can use for any purpose. Some people take these funds and apply them to a lump-sum, principal-only auto loan payment. This lump-sum payment reduces your balance and helps you avoid interest payments on that loan. 

Schedule bi-weekly payments

Making bi-weekly payments instead of monthly payments can get you out of debt sooner. Say, for example, an auto loan is $700 per month, a borrower may opt to make bi-weekly payments of $400. Those bi-weekly payments add up to $800 per month, resulting in an extra $100 per month that only goes toward the principal. 

You can also opt to make bi-weekly payments of $700 instead of monthly payments of $700 if you have the funds to make that decision. Bi-weekly payments give interest less time to compound and can put you ahead on your loan.

Pay more than your monthly minimum 

You don’t have to make bi-weekly payments to get ahead on your loan. If you have to pay $500 per month, that borrower may decide to put down $550 per month instead. Some people can comfortably manage an additional $50 per month, and it may not seem like much in the beginning. However, that additional $50 per month can add up to $600 per year. That’s more than a month of auto payments that don’t accumulate interest.

Pay Off Your Auto Loan Sooner

Getting your auto loan payments out of your monthly budget can help increase your financial flexibility. You can commit those funds to new expenses or invest in your portfolio with the extra cash. Making more than the minimum payment and minimizing the principal sooner will accelerate your path to a debt-free car.

FAQ

Is it good to pay down the principal on a car loan?

It depends on your financial situation. It can be a good idea to pay down the principal if you have enough cash to do so.

What happens if you pay off your principal car loan early?

If you pay off your car loan’s principal early, you get out of debt sooner. Some auto lenders may charge penalties for paying off the loan early, but in all cases, you are debt-free sooner.

How do I pay principal only on a car loan?

You should reach out to your lender and let it know about your situation to make principal-only payments on your car loan.

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