Making an extra payment on your car loan can help pay it off sooner. Find out if your extra payment goes to the loan principal and how to ensure it does.
Making additional payments on your next auto loan won’t instantly lower your total amount owed or cut down on interest. Rather, you need to get in direct contact with your lender and ask that the amount of your car payment be applied to the principal amount of your loan. Even then, paying extra on your car loan won’t lower your next monthly payment. To reduce your monthly auto loan payment, you’d have to refinance the loan with longer terms.
FINN car subscriptions come without the hassle of financing, including pesky hidden fees. You can simply budget each month because FINN charges a monthly subscription fee that includes insurance, registration, depreciation, and maintenance. You can select the precise car you want, down to the color and trim level, when you subscribe to FINN.
Greetings, car loan warriors! Have you ever wondered if adding more money to your loan will actually lower your monthly payments? Well, get ready as we delve into the world of car loan payments to find out the answer to this important question.
Spoiler alert: While paying extra on your car loan principal won’t magically shrink your monthly payments, it does unlock a treasure trove of other benefits that can save you big bucks in the long run. So, let’s ditch the suspense and get down to the nitty-gritty.
The Monthly Payment Mystery: Unraveling the Formula
Imagine yourself driving your brand-new car down the highway, enjoying the rush of freedom and the wind in your hair. However, the monthly automobile payment looms large in the background, serving as a continual reminder of your financial obligation.
So, how exactly is that monthly payment calculated? It’s actually a pretty straightforward formula:
Total Loan Amount + Interest / Number of Months in Loan Term equals the monthly payment.
This means that the amount you shell out each month is determined by the total loan amount, including interest, and the duration of your loan term. It’s a fixed sum, month after month like clockwork.
The Extra Payment Enigma: Does It Lower the Monthly Bill?
Let’s tackle the big issue now: Does making extra principal payments on your auto loan really lower your monthly payment? The answer is emphatically no, my friend.
Why? Because the monthly payment formula doesn’t take into account any extra payments you make. It’s based solely on the initial loan amount, interest rate, and loan term.
There’s more, though! Just because adding more money doesn’t immediately reduce your monthly payment doesn’t mean the effort is in vain. In fact, it’s a strategic move that can unlock a plethora of benefits:
- Faster Loan Repayment: By directing extra cash towards the principal, you’re essentially chipping away at the loan balance more quickly. This means you’ll be debt-free sooner, saving you a significant amount of interest in the long run.
- Reduced Overall Interest: Remember that pesky interest that’s tacked onto your loan? Well, paying extra on the principal means less money is outstanding, which translates to less interest accruing over time. It’s like a win-win situation!
- Improved Financial Flexibility: Getting rid of your car loan faster frees up your monthly budget, giving you more flexibility to pursue other financial goals, like investing, saving for a down payment on a house, or simply enjoying some extra spending money.
Making Extra Payments: Navigating the Maze
So, you’re convinced that paying extra on your car loan is the way to go? Awesome! But before you start throwing money at your lender, there are a few things you need to keep in mind:
- Talk to Your Lender: Different lenders have different policies regarding extra payments. Some may require you to specifically designate the extra amount as a principal payment, while others may automatically apply it to the principal. It’s crucial to clarify this with your lender to ensure your extra payments are going where you want them to go.
- Check for Prepayment Penalties: Some lenders may impose prepayment penalties if you pay off your loan early. This is essentially a fee for getting rid of your debt faster, so be sure to check your loan agreement for any such clauses before you start making extra payments.
- Be Consistent: Making extra payments sporadically won’t have a significant impact. The key is to be consistent and make extra payments whenever possible, even if it’s just a small amount. Every little bit counts!
Alternative Route: Refinancing for Lower Payments
If your goal is to lower your monthly car payment, there’s another option to consider: refinancing. Refinancing involves taking out a new loan with a lower interest rate, which can significantly reduce your monthly payments. However, it’s important to weigh the pros and cons before refinancing, as it may come with origination fees and other costs.
The Bottom Line: A Strategic Approach to Car Loan Payments
Whether you choose to make extra payments or explore refinancing, the key is to be proactive and strategic with your car loan. By understanding how car loan payments work and exploring your options, you can make informed decisions that save you money and get you out of debt faster.
Remember, every dollar counts! So, buckle up, take control of your car loan, and drive towards a brighter financial future!
What is a loan principal?
Learning how car loans work requires understanding what the loan principal describes. A loan principal is the primary loan amount not otherwise accounted for as fees or interest. For instance, $35,000 would be the loan principal if you bought an automobile for the agreed-upon amount of $35,000, excluding documentation costs and sales tax. Any interest accrued during the loan term remains separate.
Is it better to pay the principal or interest?
It is preferable to pay off the loan principal rather than the entire amount of interest since you can potentially pay off the loan sooner and pay off less interest. You can then use the additional money you save on interest payments for other expenses or high-interest debt. However, you should ensure your lender doesn’t charge prepayment penalties for paying off your car loan early. The money you could save would likely cover those penalty fees.
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?
How do I make sure my extra car payment goes to principal?
What happens if I pay my car payment twice a month?
Should you pay extra principal on a car loan?
If you have a car loan with simple interest, paying extra principal may minimize your total interest costs over the life of the loan. As mentioned earlier, the minimum monthly payment on a $40,000 car loan with a 60-month term and 7% simple interest rate is about $792.
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 make principal-only payments on a car loan?
Making principal-only payments on your car loan can help you build equity, save on loan interest and pay off the loan faster. But make sure you allocate extra payments in a way that saves you the most money. If your lender won’t apply extra payments to your principal, you won’t benefit as much. What is a principal-only car payment?
What happens if you pay extra on a car loan early?
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. So paying extra on the principal early in your loan will have the greatest impact on the overall amount of interest you pay.