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3 minutes read. Published September 27, 2022
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The process of paying down the principal of your car loan is a great way to quickly build equity in your vehicle. In most cases, you must indicate your lender that the loan payment is to be made only to the principal. This can be done through the internet or over the phone. Each lender has its own process but they may not accept payments made solely for principal. What is a primary-only car payment? A principal-only car payment is a type of payment that goes exclusively towards the principal balance of your car loan and is separate from your regular monthly payments. Principal is simply the amount that you borrowed initially, but with no interest added. The aim of this extra payment is to speed up the payment of the debt. Each payment made only to your principal will build equity in your car. When you accumulate equity in your vehicle, you get closer to owning it outright. This also lowers the chance of having to repay more than your car is worth. It is or getting on the loan. How to pay off the principal of an auto loan Making a principal-only payment on your car is a great way to pay off your loan more quickly. Although it’s not available across all lenders, you’ll likely have to notify the lender that the payment is for the principal balance only, and not an early payment of the next installment. Check with your lender to determine whether it is able to accept this kind of payment and how you can make one. If your lender doesn’t offer the option to make a principal-only payment but you could still be able to pay down your loan more quickly. How to pay down your car loan quicker If you aren’t able to pay in principal-only installments but you could be able to still pay off your car loan . Be sure to ensure that your lender does not charge you prior to making additional payments. Make biweekly installments If you don’t have enough funds to pay a full amount every month but an equal amount every week can cut down on the amount of interest that is paid based the method of calculation. It only works in the case of an interest rate that is precomputed, since it will be calculated the same regardless of the time when payments are made. Pay a little more than your minimum payment every month: Contact your lender to see whether they allow this kind of payment and how you can go about making one. Every little bit helps when it comes to paying down the loan quicker. Make extra lump-sum payments when you receive a bonus or tax refund, you can put it towards your vehicle loan when it’s better used elsewhere. What happens when you pay down the principal on an auto loan can affect your credit rating Paying down a car loan could appear to be a great idea initially. However, paying off your loan quickly, particularly in the short term, could have a negative impact on your credit score . In the short run your score could fall by a few percentage points, but over the long term it may increase if you have high ratio of debt to income. Other factors, like your credit mix and the history of your payments, could influence your score. To help determine whether paying the car loan early is the best option for you, think about your credit mix: Paying your auto loan off early shows lenders you are able to manage your debt effectively. But your credit mix -the various credit accounts you hold, such as credit cards, a car loan or credit card, and more — may suffer if the car loan is the only installment loan. Your payment history When you pay off a car loan earlier reduces the amount of payments that you make regularly, but it’s not as significant of an impact as revolving debt. Your ratio of debt-to income: Your debt-to earnings ratio is another crucial measure of how much debt you have compared to your income. Making a payment on a car loan can increase the DTI ratio and help to improve your credit score in the long run. How to lower the cost of your car loan each month If you’re looking to , a principal-only payment will not help, as it doesn’t reduce the minimum amount you pay. However, there are a few ways to lower the cost of your car. Refinance your loan if your credit is improving or you can find a better interest rate could aid in paying off the loan faster. When you refinance your auto loan you get the new loan with an alternative lender to pay your current loan off. This is why it’s crucial to shop around and find the best price to cut down the total price of the loan and your monthly payments. Modify your loan You can also talk with your current lender regarding . Your lender may be willing change the conditions of your loan in order to make the monthly payments more affordable. One way it can do this is by increasing your loan duration. But , doing this could mean paying more interest over the course of time. Sell or trade your car Another method to lower your payment is to get to a lower cost vehicle. Trading in your current vehicle or selling it privately will help you get the money you need to make a down payment. Then, you can locate a car that better fits your budget, and then shop to find the most suitable automobile loan available. The final point is that paying down the principal on your car loan can be a good way to build equity. If your lender will accept additional principal payments, you may make them at any time you’d like. Learn more
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Written by
This article was written using automation technology and thoroughly edited and fact-checked by an editor on our editorial staff.
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 gain the confidence to manage their finances by providing concise, well-studied and well-researched content that breaks down complicated topics into digestible chunks.
Auto loans editor
Review by Mark Kantrowtziz. Reviewed by Nationally known 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 anerkannt student financial aid expert
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