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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 smarter financial decisions by providing you with interactive tools and financial calculators as well as publishing informative and objective content. We also allow you to conduct your own research and to compare information at no cost and help you make informed financial decisions. Bankrate has partnerships with issuers including, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The products that appear on this site come from companies who pay us. This compensation may impact how and where products appear on this website, for example for instance, the sequence in which they appear within the listing categories in the event that they are not permitted by law. This applies to our mortgage or home equity products, as well as other products for home loans. This compensation, however, does affect the content we publish or the reviews that appear on this website. We do not cover the entire universe of businesses or financial offerings that could be accessible to you.



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3 minutes read. Published September 27, 2022
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The edit was done by Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping readers gain the confidence to control their finances by providing detailed, well-researched, and well-studied data that takes complicated subjects into digestible pieces.







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

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









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The process of paying down the principal of your car loan could be a smart method to increase the equity in your car. In most cases, you must indicate that to your lender that the loan payment is only going to the principal, whether through the internet or over the 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 type of payment that goes only towards the balance principal of the loan and is separate from your regular monthly payments. The principal is the amount that you borrowed initially, but without any interest added to it. The purpose of this additional payment is to accelerate payment of the debt. Every payment that goes solely toward your principal builds equity in your vehicle. When you accumulate equity in your vehicle you are closer to owning it outright. This also lowers the chance of having to repay more than your car is worth. It is or having to pay for the loan. How to pay off the principal of a car loan A principal-only installment on your car is a good way to pay off your loan quicker. While it's not the same across all lenders, you'll probably need to inform the lender that the payment is intended for the principal balance only, and not an early payment of the next installment. Make sure to check with your lender to find out if it allows this type of payment and how to proceed to make it. If your lender doesn't allow you to make a principal-only payment but you could still be able to settle your loan faster. How do you pay off your car loan quicker If you aren't able to make principal-only payments but you could still be able get rid of your auto loan . Be sure to ensure that your lender isn't charging before making any additional payments. Plan biweekly payments: You may not have enough money to pay for a complete payment every month, but an equal amount every week can cut down on the overall interest paid depending on how it's calculated. It only works in the case of a , as precomputed interest is calculated in the same way regardless of when payments are made. Make a bit more than the minimum amount every month: Contact your lender to determine whether they allow this kind of payment and how you can make it. Every bit of extra money helps in making the loan faster. Pay extra lump-sum installments: If you get a bonus or tax refund You can apply it towards your vehicle loan in the event that it is better put elsewhere. How paying down the principal on the car loan can affect your credit rating Paying down a car loan might seem like a good option at first. But paying off your loan early, especially in the short-term, could cause . In the short-term your score might drop by a few points, but in the long term you could see it improve if you've got a high debt-to-income ratio. Other factors, including your credit history and your payment history, can also affect your score. To help determine whether the idea of paying the car loan early is right for you, consider the followingfactors: Your credit mix: Paying your auto loan early will show lenders that you can manage your debt well. But your credit mix -- the variety of credit accounts you hold including credit cards, a car loan, credit cards and others -- could take a hit if the car loan is your only installment loan. Your payments history: Paying off a car loan early reduces the number of regular payments, however it's not having as big of an impact on your credit score as revolving debt. Your debt-to-income ratio: Your debt to income ratio is a different factor that considers how much debt you have compared to your income. Making a payment on the balance of your car loan may increase the DTI ratio and improve your credit score in the long run. How to reduce your monthly car payments If your goal is to pay in full, a payment that is solely for principal won't help, since it doesn't reduce your minimum monthly payment. But, there are couple of ways to reduce the cost of your car. Refinance If your credit has improved or you have an attractive interest rate, can and potentially help you pay it off more quickly. When you refinance your auto loan You take out the new loan from a different lender to pay your current loan off. This means it's important to research and locate the best price to reduce the total amount of your loan and monthly payments. Modify your loan You can also talk with your current lender about . Your lender may be willing to alter the terms for the loan so that you can make monthly payments affordable. One way it can do this is to extend your loan duration. But , doing this could mean paying more interest in the long run. Trade or sell your car Another option to reduce the amount you pay is to go into a cheaper car. Selling your car or selling it privately will help you get the money you need for a downpayment. From there you can find an automobile that is more suitable for your budget and search to find the most suitable auto loan available. The final point is that paying down the principal of your car loan can be a good way to build equity. If your lender will accept the possibility of additional payments to your principal, you can make them at any time you'd like. Find out more


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Written by

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



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

Rhys has been writing and editing for Bankrate from late 2021. They are dedicated to helping their readers feel confident to control their finances through providing clear, well-researched information that breaks down complicated topics into manageable bites.






Auto loans editor


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

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






Nationally recognized student financial aid expert




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