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How paying the principal affects your car loan Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our goal is to help you make better financial choices by offering you interactive financial calculators and tools as well as publishing informative and objective content. This allows you to conduct research and compare information for free to help you make informed financial decisions. Bankrate has partnerships with issuers, including but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The offers that appear on this website are provided by companies who pay us. This compensation could affect how and when products are featured on the site, such as, for example, the order in which they appear within the listing categories and other categories, unless prohibited by law for our mortgage, home equity and other home lending products. However, this compensation will affect the information we provide, or the reviews that you read on this site. We do not contain the vast array of companies or financial offers that may be open to you.



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3 min read Published September 27 2022
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Written by Bankrate Written by

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







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 dedicated to helping readers gain confidence to control their finances with clear, well-researched facts that break down complex topics into manageable bites.







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

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









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Paying down the principal on your car loan is a great way to quickly increase the equity in your car. Usually, you will need to indicate to the lender that the loan payment is only going to the principal, either online or over the phone. Each lender uses its own method but some do not allow principal-only payments. What is a principal-only car payment? A principal-only car loan is a loan payment that is solely toward the balance principal of the car loan and is not part of your regular monthly payments. It is the principal amount you initially borrowed, without any interest added. The purpose of this additional payment is to accelerate your repayment of the loan. Every payment that goes only to your principal will build equity in your car. As you build equity in your vehicle you'll be closer to owning the car outright. This also lowers the chance of owing more than your car is worth -- or having to pay for the loan. How do you pay off the principal amount on a car loan The principal-only option for your car is a great option to pay off your debt more quickly. While it's not the same for every lender, you'll probably need to inform the lender that this payment is made intended for the principal balance only and not an early payment for the following installment. Contact your lender to find out whether they allow this kind of payment and how to proceed to make it. If your lender doesn't allow you to make a principal-only payment however, you might be able to pay down your loan more quickly. How can you pay off your car loan faster If you can't pay in principal-only installments but you could still be able get rid of your auto loan . Make sure your lender isn't charging before making any additional payments. Schedule biweekly payments If you don't have the money to pay for a complete payment twice a month but making one half-payment every other week can cut down on the amount of interest that is paid based on how it's calculated. This only works out if it is a , as precomputed interest is calculated in the same way regardless of when payments are made. Make a bit more than your minimum payment each month: Talk to your lender to see if it allows this type of payment and how you can go about making one. Every little bit helps in making the loan more quickly. Consider lump-sum payment payments in addition to your regular monthly ones in the event of the benefit of a tax refund or bonus You can apply it towards your car loan if it wouldn't be better put somewhere else. How paying down the principal on an auto loan affects your credit A car loan could seem like a good option at first. However, paying off your loan early, especially in the short term could have a negative impact on your credit score . In the short term your score might decrease by a few points, but in the long term, it could improve if you have an excessive debt-to-income ratio. Other factors, such as your credit mix and payment history, can also impact your score. To help determine whether the idea of paying the car loan early is the best option for you, take a look at your credit score: Paying off your auto loan off earlier shows lenders you are able to manage your debt effectively. But your credit score -that is, the different credit accounts you have like credit cards, a car loan or credit card, and many more -- could be affected when your car loan is your only installment loan. Your payment history When you pay off a car loan early can reduce the number of regular payments, however it's not as significant of an impact as revolving debt. Your debt-to-income ratio: Your debt to income ratio is another crucial factor that considers how much debt you have compared to your earnings. The process of paying down a car loan may increase the DTI ratio and improve your credit score in the long run. How can you lower the cost of your car loan each month If you're looking to , a principal-only payment will not help, as it won't lower your minimum monthly payment. There are however a few ways to lower the cost of your car. Refinance if your credit score is improving or you can find an interest rate that is better could aid in paying off the loan more quickly. When you refinance your automobile loan, you take out the new loan from another lender to pay off your existing loan off. This is why it's crucial to research and locate the best price to cut down the total amount of your loan and your monthly payment. Modify your loan You can also talk to your current lender about . Your lender may be willing to alter the conditions that apply to the loan for the purpose of making monthly payments more affordable. One method to accomplish this is by extending your loan term. But doing so will mean paying more interest in the long run. Sell or trade in your vehicle Another option to reduce the cost of your loan is to move into a less expensive car. Selling your car as well as selling the vehicle privately could provide you with the money needed to make a down payment. You can then find a car that better fits your budget and search for the most affordable auto loan available. The main thing to consider is paying down the principal amount on your car loan is a great way to build equity. If your lender will accept the possibility of additional payments to your principal, you are able to make them at any time you'd like. Find out more


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Written by

This article was generated with the help of automation technology, and then edited and fact-checked by an editor on our editorial team.



Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate from late 2021. They are committed to helping readers to control their finances with clear, well-researched information that breaks down otherwise complex topics into digestible chunks.






Auto loans editor


Reviewed by Mark Kantrowtziz Reviewed by Nationally known student financial aid expert

Mark Kantrowitz is an expert on student financial aid The FAFSA, 529 plans, scholarships educational tax benefits, student loans.






Nationally acknowledged expert in student financial aid




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