How principal payments affect your auto loan
How principal payments affect your auto loan

Paying off the principal of a car loan can be a great way to quickly build up your car equity. You usually have to tell the lender that the payment can only be made through the principal, whether online or over the phone. However, each lender has its own process, and not all lenders only accept principal payments.

What is Principal Only Autopay?

A car principal-only payment is a payment for only the principal of your auto loan, separate from your normal monthly payments. Principal is the amount you originally borrowed without interest. The purpose of this special payment is to expedite debt repayment.

Any payments made for your capital alone will build equity in your car. When you build assets in a car, you get closer to full ownership. It also reduces the risk of owing more than the car’s value — also known as an inversion loan.

How to pay off the principal of a car loan

A one-time payment on your car is a great way to pay off your balance faster. While this is not the case with all lenders, you may need to notify the lender directly that the payment is for the principal amount only and not an early payment for the next period.


Please confirm with you whether and how such payments are permitted. If your lender doesn’t offer the option to pay only one principal, you can still pay off the loan faster.

How to Pay Off Your Auto Loan Faster

If you can’t pay the pure principal, you can still pay off your car loan early. Before making any additional payments, make sure your lender doesn’t charge any prepayment penalties.

Schedule bi-weekly payments: You may not have enough money to make two full payments each month, but making half payments every two weeks can reduce the total interest you pay, depending on how you calculate it. This only applies to simple interest auto loans, as the pre-calculated interest is the same regardless of when the payment is 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 make it. Every little bit helps when it comes to paying off your loan faster.
One-time extras: If you get a bonus or tax rebate, you can factor it into your car loan, and nowhere else is better.

How car loan principal repayments affect your credit score

At first, paying off your car loan might seem like a good idea. But paying off your loan early, especially in the short term, can affect your credit score.

Your score may drop a few points in the short term, but if your debt-to-income ratio is high, it may improve in the long run. Other factors, such as your credit portfolio and payment history, also affect your score.

To determine if paying off your car loan early is right for you, consider the following:


Your loan portfolio: Paying off your auto loan early shows lenders that your debt is being managed properly. However, when your car loan is your only installment loan, your loan portfolio (the various credit accounts you have, such as car loans, credit cards, etc.) may be affected.
Your repayment history: Paying off your auto loan early will reduce the number of regular payments, but not as much as revolving debt.
Your debt-to-income ratio: Your debt-to-income ratio is another important factor that takes into account how much your debt is compared to your income. Paying off your 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 lower your monthly car payments, a principal payment alone won’t help because it won’t lower your minimum payment.

However, there are several ways to lower your monthly car payment.



Refinancing your auto loan can save you money and potentially make repayments faster if your credit rating improves or you find a better interest rate. When you refinance a car loan, you get a new loan from a different lender to pay off your current loan. This means it’s important to shop around and find the best deal to reduce the overall cost of your loan and monthly repayments.

Change your loan

You can also discuss changing your current car loan with your current lender. Your lender may be willing to change the terms of your loan to make monthly payments more affordable. One way is to extend the loan term. In the long run, however, this means you pay more interest.

Sell or trade your car

Another way to lower your payments is to take a cheaper vehicle. You can get down payment funds if you are privately trading or selling your current vehicle. From there, you can find a car that better fits your budget and shop around to get the best car loan.

Final result

Paying off the principal of a car loan can be a great way to build assets. If your lender accepts additional principal payments, you can pay them at any time. Just ask your lender if and how such payments are allowed.

So learn more:

Jake Smith

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Jake Smith

He is the editor of Eragoncred. Previously, he was editor-in-chief of Eragoncred and a financial industry reporter. Jake has spent most of his career as a Digital Media journalist and has over 10 years of experience as a writer and editor.