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.
You always want our extra payment to be applied to principal, not interest. As long as your are current on your mortgage, your normal payment covers all of the interest to date. Paying extra principal now reduces your future interest payments. I will try a simple example. Mortgage loan of $100000.
The down payment on a vehicle goes directly toward the vehicle, which is part of the principal. The larger your down payment, the less principal you'll have to pay.
Here's the scoop: When you pay more than the minimum required, the extra cash usually goes toward reducing the principal balance of your loan. This is the actual amount you borrowed, not counting the interest.
Extra car payments generally go toward reducing the principal, but you should check. If you decide to make additional payments, it's important to confirm with your lender that they are applied correctly.
Making bi-weekly payments instead of monthly payments can get you out of debt sooner. Say, for example, an auto loan is $700 per month, a borrower may opt to make bi-weekly payments of $400. Those bi-weekly payments add up to $800 per month, resulting in an extra $100 per month that only goes toward the principal.
It's good practice to make a down payment of at least 20% on a new car (10% for used). A larger down payment can also help you nab a better interest rate. But how much a down payment should be for a car isn't black and white. If you can't afford 10% or 20%, the best down payment is the one you can afford.
Lenders often want you to make a down payment to show your commitment to paying back the loan and to get some compensation for the car upfront.
Monthly payments: Paying extra principal on a mortgage doesn't normally lower your monthly payment, so you'll still need to keep that regular monthly payment in mind.
Key Takeaways
Interest on a car loan is often front-loaded so early payments pay more toward interest and less toward the principal loan balance. A longer-term loan can lower the monthly payment but the total interest paid is higher so you'll pay more for the car overall.
Called the five Cs of credit, they include capacity, capital, conditions, character, and collateral. There is no regulatory standard that requires the use of the five Cs of credit, but the majority of lenders review most of this information prior to allowing a borrower to take on debt.
The key is to specify to your lender that you want your extra payments to be applied to your principal. If you don't make this clear, you may find the extra payment going toward the interest you owe rather than the principal.
Making additional principal payments will reduce the principal balance and long-term interest charges; however, the extra principal payments will not lower your ongoing monthly car loan payment amount.
You could save interest and free up room in your budget by paying your auto loan off early. There are several options available — including refinancing, paying biweekly and rounding up payments, just to name a few. Confirm your lender doesn't charge a prepayment penalty since the cost could be more than what you save.
An example of the difference a loan's term can make: If you take out a $40,000 new car loan with an 84-month term at 9% APR, you would pay about $623 monthly and $12,369 in total interest over seven years.
What Are the Disadvantages of a Large Down Payment? Providing more money down doesn't guarantee a lower interest rate, and it can cut into your savings. Depending on the vehicle you choose to buy, 50% can be a lot of money to put down on an auto loan.
Payment Amount
For example, for a car price of $20,000, a down payment of $4,000, a loan amount of $16,000, a loan term of 48 months, an annual interest rate of 5%, and a start-of-period payment method, your payment amount would be $366.94. You would be paying this amount each month for your auto loan.
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.
By paying half of your monthly payment every two weeks, each year your auto loan company will receive the equivalent of 13 monthly payments instead of 12. This simple technique can shave time off your auto loan and could save you hundreds or even thousands of dollars in interest.
Putting down a larger down payment will increase your equity because you won't need to finance as much through a lender. Cars are a depreciating asset. As the value of your vehicle decreases, you're more likely to go upside down on your loan — when you owe more than your car is worth.
Applying extra payments directly to the principal (that is, the amount of money you borrowed) is ideal because it reduces both the amount you owe and your total interest.
72 months equals 6 years. To figure this out, we recognize the well-known relationship between months and years. That is, there are 12 months in 1 year.
Dealing with Negative Equity
If you have negative equity in a car, consider these options: Wait to buy another car until you have positive equity in the one you're still paying for. For example, consider paying down your loan faster by making additional, principal-only payments. Sell your car yourself.