However, you can make a principal-only payment on installment loans, such as auto loans and personal loans.
Key takeaways
A principal-only car payment is an extra payment on your auto loan that is applied only to the principal amount of the loan. Lenders don't always automatically apply extra payments to the principal. Making principal-only payments can help you pay off your auto loan faster and save you money on the loan.
Making extra payments on a personal loan gets you out of debt faster, reduces the amount of interest you pay, and can improve your finances. However, it's important to balance paying off your personal loan faster with your other financial goals, such as building an emergency fund or saving for retirement.
Given the choice, almost always better to pay principal over interest. That said, you will generally be required to pay off any interest that has accrued before devoting money to principal.
Since interest is based on the principal amount, with a fixed-rate mortgage, reducing your principal balance ahead of schedule will reduce the amount of money you'll pay in interest before it can accrue.
Rather than delaying credit until the next month, the optimal day within the month to make an extra payment is the last day on which the lender will credit you for the current month.
Making extra payments or picking up a side job are effective ways to pay off a personal loan faster. Tightening your budget or refinancing your loan can also help with early payoff.
You'll pay less in interest.
If you decide to pay off some or all your loan early, you won't have to pay the full amount of interest detailed in the original credit agreement. Under the Consumer Credit Act, the total amount of interest payable is reduced by a statutory rebate, which will be calculated by your lender.
By making bi-weekly payments, you will comparatively make an extra monthly payment each year which will reduce your amount owed. By making payments every other week, you will also save a bit on interest charges for the outstanding loan balance that would normally still be there until the end of the month.
Save on interest
The amount of interest you pay each month is calculated using your principal balance. As your principal balance decreases, your interest goes down as well. You could potentially save thousands of dollars in interest over the life of your loan by paying down your principal faster.
An increase in your monthly payment will reduce the amount of interest charges you will pay over the repayment period and may even shorten the number of months it will take to pay off the loan.
Principal-only payments are a way to potentially shorten the length of a loan and save on interest. If your lender allows it, you can make additional payments directly toward the amount of money you borrowed — the principal — which can help you pay off your loan faster.
A simple way of ensuring that you pay your personal loan faster is by making an extra payment every year. Paying one additional EMI each year will help you pay off your loans more quickly.
Loan prepayment reduces your credit mix and shortens your credit history, factoring in a lower score. Ensure that paying off a loan early does not deplete your emergency funds. Keep a healthy amount of liquid funds available for emergencies or other financial needs.
When you stop paying a personal loan, the consequences depend on the type of loan and how overdue your payments become. Failing to pay could result in your account going into default, the balance being sent to collections, your lender taking legal action against you and your credit score dropping significantly.
The repayment period for a personal loan can be anywhere from two to five years, but some are as long as seven years. Car loans are generally six years long on average, while student loans typically have a 10-year timeline, but it could take longer if you're on an income-driven repayment plan.
Any funds you pay in addition to your monthly payment amount will be automatically applied to your principal balance unless you specify otherwise.
Save on interest
Since your interest is calculated on your remaining loan balance, making additional principal payments every month will significantly reduce your interest payments over the life of the loan. By paying more principal each month, you incrementally lower the principal balance and interest charged on it.
Your Double-Up payment is applied directly against the principal balance of your mortgage, which cuts down the life of your mortgage and saves interest costs.