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Paying extra toward the principal wont lower your monthly car payment. It may save you money in the long run by shortening the loan.
The lender uses a straightforward formula to determine how much you will pay each month at the start of your auto loan: divide the total loan amount, including interest, by the number of months in the loan term.
The Short Answer: No
Making extra payments towards your car loan’s principal won’t directly decrease your monthly payment. However, it can offer significant benefits in the long run, saving you money and potentially shortening the loan’s duration
How Car Loan Payments Work:
A straightforward formula is used to determine your monthly car payment: divide the total loan amount (interest included) by the number of months remaining in your loan term. As a result, there is a set monthly payment that is due for the duration of the loan.
The Power of Principal Payments:
While paying extra won’t immediately lower your monthly payment, it can significantly impact your overall loan experience. Here’s how:
- Reduced Interest: Most car loans use simple interest, meaning interest is calculated monthly based on the outstanding principal balance. Early in the loan, a larger portion of your payment goes towards interest. By making extra principal payments, you reduce the outstanding balance faster, minimizing the interest you accrue over time.
- Shorter Loan Term: Paying extra towards the principal can shorten the loan’s duration. This means you’ll be debt-free sooner, saving you money on interest payments in the long run.
- Faster Equity Buildup: As you pay down the principal, you build equity in your car faster. This can be beneficial if you plan to sell or trade-in your vehicle before the loan is fully paid off.
Making Extra Payments:
Making extra payments towards the principal isn’t always straightforward. Here are some tips:
- Contact your lender: Inquire about their specific process for designating extra payments towards the principal. Some lenders may require you to mark a checkbox, include a note with your payment, or send the extra amount to a different address.
- Check your loan statement: Ensure your extra payment was applied correctly towards the principal and not interest.
- Ask about prepayment penalties: Some lenders may charge prepayment penalties if you pay off your loan early.
Alternatives for Lowering Your Monthly Payment:
Even though increasing the principal won’t immediately reduce your monthly payment, take into account these options:
- Refinance your car loan: Refinancing involves replacing your existing loan with a new one that offers a lower interest rate. This can potentially reduce your monthly payment and save you money over the loan’s term.
- Extend your loan term: Extending your loan term can lower your monthly payment, but it will also increase the total interest you pay over the life of the loan.
Remember:
- Paying extra on your car loan’s principal is a great way to save money and potentially shorten the loan’s duration.
- Consider refinancing or extending your loan term if you want to lower your monthly payment.
- Always compare options and do your research before making any financial decisions.
Why pay extra on car loan principal?
Paying extra on your auto loan principal won’t decrease your monthly payment, but there are other benefits. Making principal payments lowers your loan balance more quickly, expedites loan repayment, and results in cost savings.
The majority of auto loans use simple interest, which computes interest each month based on the remaining principal amount owed. Each month, a portion of your car payment goes to the principal and a portion to interest. At the beginning of the loan, a larger part of your payment goes to interest. Therefore, the biggest influence on the total amount of interest you pay will come from making extra principal payments early in your loan.
How to pay extra on car loan principal
Paying extra toward the principal isn’t always as easy as just sending extra money with your car payment.
Find out from your lender if there is a particular method, like checking a box, attaching a note with the payment, or mailing the additional amount to a different address, for indicating when an additional payment should be applied to the principal. Additionally, confirm that the principal and interest amounts on your loan were allocated as you anticipated by looking over your loan statement.
Inquire with the lender about any prepayment fees as well, as adding more funds to the principal will allow you to pay off your loan earlier.
Paying Off Car Loan Early | Principal vs Extra Payment Explained
FAQ
Do extra payments automatically go to principal?
What happens if I pay extra on my car payment?
What happens if I pay my car payment twice a month?
How much of car payment goes to principal vs interest?
Should you pay extra on the principal on a car loan?
As you work to get into financial shape, one of the best exercises is to pay extra on the principal on your car loan. Each car loan payment is a mix of interest and principal. The loan agreement for your car should spell out how much interest you’ll pay over the loan term.
What happens if you don’t pay your principal on a car?
If your lender won’t apply extra payments to your principal, you won’t benefit as much. What is a principal-only car payment? The principal on your car loan is the sum of money you borrowed from the lender. Your typical monthly payment goes toward what you owe on the principal, the accumulated interest and loan fees.
Should you pay extra on a car loan?
At the beginning of the loan, a larger part of your payment goes to interest. So paying extra on the principal early in your loan will have the greatest impact on the overall amount of interest you pay. Paying extra toward the principal isn’t always as easy as just sending extra money with your car payment.
Should you pay off principal on a car loan?
Your loan will remain on the same fixed payment schedule unless you refinance. Paying off the principal faster than expected, however, could reduce your overall car loan term without changing the monthly payments. It would take fewer total months to pay off what you owe. Paying principal comes with advantages and disadvantages.