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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 aim is to assist you make better financial decisions by offering you interactive tools and financial calculators that provide objective and original content. We also allow users to conduct research and compare data for free - so that you can 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 Make Money The products that appear on this website are provided by companies that compensate us. This compensation may impact how and where products are displayed on this site, including such things as the sequence in which they appear within the listing categories, except where prohibited by law for our mortgage, home equity and other home loan products. But this compensation does have no impact on the content we publish or the reviews that you see on this site. We do not include the entire universe of businesses or financial offers that may be available to you.



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3 min read Published September 27, 2022
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Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate from late 2021. They are passionate about helping readers gain the confidence to manage their finances through providing clear, well-researched facts that break down otherwise complex topics into manageable bites.







Review by Mark Kantrowtziz. Reviewed by Nationally known student expert on financial aid

Mark Kantrowitz is an expert on student financial aid, the FAFSA and 529 plans, scholarships 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 increase the equity in your car. In most cases, you must indicate your lender that the money is to be made only to the principal, whether via the internet or by phone. Each lender has their own procedure, though, and not all accept principal-only payments. What is a principal-only vehicle payment? A principal-only car loan is a payment that goes only towards the balance principal of the car loan and is distinct from the regular monthly installment. The principal is the amount you borrowed initially, but without additional interest. The purpose of this additional payment is to help speed up payment of the debt. Each and every payment you make that is exclusively to the principal amount builds equity in your vehicle. When you accumulate equity in your car, you get closer to owning the car outright. This also lowers the chance of having to repay more than your car is worth. This is also called being on the loan. How do you pay off the principal of an auto loan Making a principal-only payment on your car is a great way to pay down your balance quicker. Although it's not the same for every lender, you'll likely need to directly notify the lender that this payment is made to pay the principal amount only, not an earlier payment of the next installment. Contact your lender to determine whether it is able to accept this kind of payment, and then make one. If your lender doesn't offer the option to make a principal-only payment however, you might be able to settle your loan more quickly. How to pay down your car loan quicker If you aren't able to make principal-only payments, you may still be able pay off your car loan . Make sure your lender isn't charging before making any additional payments. Make biweekly installments: You may not have enough funds to pay for a complete payment every month but an equal amount every week will reduce the amount of interest that is paid based on how it's calculated. This is only true when it's 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 every month: Contact your lender to find out if it allows this type of payment and how to do it. Every little bit helps when it comes to making the loan more quickly. Make extra lump-sum payments in the event of a bonus or tax refund, you can put it toward your car loan when it's better put in another place. What happens when you pay down the principal of the car loan can affect your credit rating A car loan could seem like a good idea at first. But paying down your loan earlier, particularly in the short term, could cause . In the short term your score could drop by a few points, but in the long term it may improve if you've got high ratio of debt to income. Other factors, such as your credit history and your payment history, may influence your score. To help determine whether the idea of paying off your car loan early is the best option for you, consider the followingfactors: Your credit mix: Paying your auto loan early will show lenders that you are able to manage your debt effectively. But your credit mix -the various credit accounts you have including the car loan, credit cards and more -- may be affected if the car loan is your sole installment loan. Your payment history If you're able to pay off your car loan earlier reduces the amount of regular payments, but it doesn't have as much of an impact on your credit score as revolving debt. Your debt-to-income ratio: Your debt-to-income ratio is another crucial factor that considers how much debt you owe compared to your earnings. Making a payment on a car loan may boost your DTI ratio and help to improve your credit score over time. How to reduce your monthly car payments If you're trying to pay in full, a payment that is solely for principal won't help, since it won't lower your minimum monthly payment. However, there are a several options to reduce the cost of your car. Refinance If your credit has improved or you find an interest rate that is better, can and potentially aid in paying off the loan more quickly. When you refinance your auto loan You take out an entirely new loan with another lender to pay the existing loan off. It is therefore important to look around for the best deal possible to cut down the total cost of your loan and your monthly payment. Modify your loan You can also talk to your current lender regarding . Your lender might be willing to change the conditions that apply to the loan so that you can make your monthly payments less expensive. One way to do this is by increasing the loan duration. But , doing this could mean paying more interest over the course of time. Sell or trade in your vehicle Another method to lower your payment is to get into a less expensive car. Trading in your current vehicle and/or selling your car privately can provide you with the money needed for a down payment. Then, you can locate a car that better fits your budget and search to find the most suitable car loan available. The final point is that paying down the principal of your vehicle loan can be a good option to build equity. If your lender allows the possibility of additional payments to your principal, you may make one anytime you want. Find out more


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Written by

This article was generated by using automated technology. It was then thoroughly checked for accuracy and editing by an editor on our editorial team.



Edited 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 their readers feel confident to manage their finances with concise, well-studied and well-researched content that break down complex topics into manageable bites.






Auto loans editor


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

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






Nationally recognized student financial aid expert




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