Paying down your car loan principal can be a great way to quickly increase the equity in your car. Often you need to tell the lender that payment is for the originator only, either online or over the phone. Each lender has their own process, however, and not all accept principal-only payments.
What is a Principal Only Car Payment?
A principal-only car payment is a payment that is applied only to the principal balance of your car loan and is separate from your normal monthly payment. The principal is the amount you originally borrowed, with no interest added. The purpose of this additional payment is to accelerate the repayment of the debt.
Each payment that goes only to your capital strengthens the equity in your car. As you accumulate equity in your car, you get closer to outright ownership. It also reduces the risk of owing more than your car is worth — also called being Upside down on the loan.
How to repay the capital of a car loan
Making a principal payment only on your car is a good way to pay down your balance faster. Although not the same for all lenders, you will likely need to tell the lender directly that the payment is for the principal balance only and not an early payment of the next installment.
Check with yours if they allow this type of payment and how to go about making one. If your lender doesn’t offer the option of making a principal-only repayment, you may still be able to pay off your loan faster.
How to pay off your car loan faster
If you are unable to repay only the principal, you may still be able to repay your car loan. ahead of schedule. Just make sure your lender doesn’t charge prepayment penalties before making additional payments.
- Schedule payments every two weeks: You may not have the money to make a full payment twice a month, but making a half payment every two weeks can lower the overall interest paid depending on how it’s calculated. This only works if it is a simple interest car loanbecause the pre-calculated interest will be applied in the same way, regardless of when the payments are made.
- Pay a little more than your minimum payment each month: Check with your lender to see if they allow this type of payment and how to go about making one. Every little bit counts when it comes to paying off the loan faster.
- Make additional lump sum payments: If you get a bonus or tax refund, you can allocate it to your car loan if it wouldn’t be better placed elsewhere.
How Car Loan Principal Repayment Affects Your Credit
Paying off a car loan may seem like a good idea at first. But paying off your loan early, especially in the short term, can affect your credit.
In the short term your score may drop a few points, but in the long term it could improve if you have a high debt ratio. Other factors, such as your credit mix and payment history, can also affect your score.
To help you determine if prepaying your car loan is right for you, consider the following:
- Your credit composition: Paying off your auto loan early shows lenders that you can manage your debt well. But your credit mix — the variety of credit accounts you have, like a car loan, credit cards, and more — can suffer if your car loan is your only installment loan.
- Your payment history: Paying off a car loan early reduces the number of regular payments, 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 important factor that takes into account how much debt you have relative to your income. Paying off a car loan can improve your DTI ratio and help improve your credit score over time.
How to lower your monthly car payment
If your goal is to reduce your monthly car paymenta principal-only payment will not help, as it does not reduce your minimum payment.
However, there are several ways to lower your monthly car payment.
If your credit has improved or you find a better interest rate, refinance your car loan box save you money and potentially help you pay it back faster. When you refinance your car loan, you take out a new loan from another lender to pay off your current loan. This means it’s important to shop around and find the best deal possible to lower the overall cost of your loan and your monthly payments.
Modify your loan
You can also talk to your current lender about modify your current car loan. Your lender may be willing to change the terms of your loan to make monthly payments more affordable. One way to do this is to extend the term of your loan. But it will mean paying more interest in the long run.
Sell or trade in your car
Another way to lower your payment is to get into a less expensive vehicle. Trading in your current vehicle or selling it privately can help you get the funds you need for a down payment. From there, you can find a car that better fits your budget and search for the best auto loan available.
The bottom line
Repaying the principal of your car loan can be a good way to build capital. If your lender accepts additional principal payments, you can make one whenever you want. Just check with your lender to see if they allow this type of payment and how to go about making one.