How to Pay Toward the Principal on a Car Loan

The less you owe on your car loan (the principal), the less you’ll pay in interest. By making an additional payment on the principal, you can shorten your loan and save money.

But if you pay extra on your car loan, does it go to the principal automatically? Not always, so be sure to check.

Here’s what you need to know about how to pay towards the principal on a car loan and when it’s a good idea.

Key takeaways

• Principal-only payments are applied solely to the principal loan balance.
• Paying down the principal can save on interest and shorten the loan term.
• If making additional payments isn’t an option, refinancing is an alternative.

What is a principal-only payment?

When it comes to any type of auto loan, most of the car payment usually goes to pay fees and interest first, while the principal balance — the amount you actually borrowed to buy your car, including dealer’s fees — gets paid down more slowly.

But if you make an extra “principal-only payment,” it will go entirely toward the principal. A lower principal balance means lower interest payments, helping you pay off your car loan early.

If I pay extra on my car loan, does it go to the principal?

Extra payments made on your car loan usually go toward the principal balance, but you’ll want to make sure.

Some lenders might instead apply the extra money to future payments, including the interest, which is not what you want. Check with your lender or review your loan statement to be certain any extra payments are applied correctly.

How to make a principal-only payment

Making a principal-only payment is a key to paying off your car loan faster. You have a few options on how to find this extra money for principal-only payments:

• Pay a lump sum: If you have some savings or a sudden windfall, you could make a one-time lump sum payment directly toward the principal, saving you money on future interest.
• Make biweekly payments: Instead of paying monthly, consider making a half payment every two weeks. This way, you’ll end up making the equivalent of one extra payment a year without much effort, helping cut down your interest.
• Round your payments up: Round up your regular payment amount to the nearest hundred (or even thousand) dollars, and put the extra amount toward the car loan principal.
• Tweak your payment schedule: Adjust your payment schedule in some other way to pay more frequently, even if it’s only a little.

Paying on principal vs. interest

Paying the principal of a loan directly cuts down the amount you owe. As mentioned above, the less principal remains, the lower the interest payments, so paying down the principal reduces the overall cost of the loan.

Paying interest, on the other hand, has no effect on the principal and doesn’t lower future interest payments.

Keep in mind that at the start of the loan, most of your payments are usually going toward interest, with the size of the principal payment rising slowly. For this reason, principal-only payments can be very effective early in the loan.

Payment example

If you have a $745.72 payment for 60 months at 4.5% interest, here’s what your first and last payments would look like:

• First payment: $150 goes to interest and $595.72 to principal.
• Last payment: $2.79 goes to interest and $742.93 goes to principal.

Is it better to refinance or make extra payments?

Making extra payments is a good way to lower your car payments and repay your loan faster, but so is auto loan refinancing.

When choosing between the two, you’ll want to look at how much cash you have for extra payments and what kind of interest rate you can get if you refinance.

If you can find a car loan refinance rate significantly lower than your current loan rate, refinancing might be the better choice.

Try our auto loan refinance calculator to compare your current payments with refi loan offers you find online.