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Edited by Rhys Subitch Edited by Auto loans editor

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Reviewed by Mark Kantrowtiz Reviewed by Nationally recognized student expert on financial aid

Mark Kantrowitz is an expert on student financial aid, including the FAFSA, scholarships, 529 plans as well as tax benefits for education and student loans.









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Paying down the principal on your car loan could be a smart way to quickly build equity in your vehicle. In most cases, you must indicate your lender that the money is only going to the principal, whether via the internet or by phone. Each lender has their own procedure, though, and some do not allow principal-only payments. What is a principal-only vehicle payment? A principal-only car loan is a payment that goes solely toward the balance principal of the loan and is separate from your regular monthly payments. Principal is simply the sum you initially borrowed, without any interest added to it. The purpose of this additional payment is to speed up the your repayment of the loan. Each payment made exclusively to the principal amount builds equity in your car. As you build equity in your vehicle, you get closer to owning it for the first time. Also, it reduces the possibility of having to pay more than the car is worth. It is also called having to pay for the loan. How to pay off the principal amount on an auto loan The principal-only option on your car is a great way to pay off your loan more quickly. While it's not the same with every lender, you'll probably need to inform the lender that your payment is intended for the principal balance only, not an earlier payment for the following installment. Contact your lender to find out whether they allow this kind of payment, and then proceed to make it. If you lender does not offer the option to pay in principal only, you may still be able to pay your loan quicker. How to pay down your car loan quicker If you aren't able to make principal-only payments however, you might still be able to make payments towards your vehicle loan . Just make sure that your lender doesn't charge before making additional payments. Plan biweekly payments: You may not have enough money to pay for a complete payment every month, but a half payment every other week will reduce the amount of interest that is paid based on the way it's calculated. This only works out in the case of an interest rate that is precomputed, since it is calculated in the same way regardless of the date when the payment is made. Make a bit more than the minimum each month: Talk to your lender to find out whether they allow this kind of payment, and also how to go about making one. Every little bit counts when it comes to paying down the loan more quickly. Make extra lump-sum payments when you receive a bonus or tax refund You can apply it towards your car loan if it wouldn't be better put elsewhere. How paying down the principal of a car loan affects your credit A car loan could seem like a good idea at first. But paying off your loan earlier, particularly in the short term can . In the short-term your score might drop by a few points, but in the long run, it could increase if you have an excessive debt-to-income ratio. Other factors, including your credit mix and the history of your payments, could impact your score. To determine whether the idea of paying on your auto loan earlier is the right choice for you, consider your credit mix: Paying your auto loan off earlier shows lenders you can manage your debt effectively. However, your credit mixthat is, the different credit accounts you hold, such as the car loan, credit cards and others -- could suffer in the event that your car loan is your only installment loan. Your payments history When you pay off a car loan early can reduce the number of payments that you make regularly, but it doesn't have as much of an impact as revolving debt. Your debt-to-income ratio: Your debt to income ratio is another crucial aspect that determines the amount of debt you have compared to your income. Paying down the balance of your car loan can improve your DTI ratio and improve your credit score in the long run. How can you lower your monthly car payments If you're trying to pay in full, a payment that is solely for principal will not help, as it doesn't reduce your minimum monthly payment. There are however a several options to reduce the cost of your car. Refinance your loan if your credit is improving or you can find an attractive interest rate could assist you in repaying it more quickly. If you decide to refinance your car loan You take out a new loan with a different lender to pay your present loan off. This is why it's crucial to shop around and find the best price to lower the overall price of the loan and monthly payments. Modify your loan You may also speak to your current lender about . Your lender might be willing to change the terms of the loan in order to make monthly payments more affordable. One method to accomplish this is to extend your loan period. But doing so will mean paying more interest in the long run. Sell or trade in your vehicle Another option to reduce the amount you pay is to go into a less expensive vehicle. Selling your car as well as selling the vehicle privately will provide you with the money needed to make a down payment. Then, you can locate an automobile that is more suitable for your budget and shop around for the most affordable automobile loan available. The final point is that paying down the principal on your vehicle loan could be a smart option to build equity. If your lender will accept additional principal payments, you may make them at any time you'd like. Find out more


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Written by

This article was generated using automation technology and thoroughly edited and fact-checked by an editor on our editorial staff.



The edit was done by Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers to take control of their finances by providing clear, well-researched information that break down complex topics into digestible chunks.






Auto loans editor


Reviewed by Mark Kantrowtiz Reviewed by Nationally recognized student financial aid expert

Mark Kantrowitz is an expert on student financial aid including the FAFSA as well as 529 plans, scholarships, education tax benefits and student loans.






Nationally recognized student financial aid expert




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