Paying extra toward the principal won’t lower your monthly car payment. It may save you money in the long run by shortening the loan.
The amount you will pay each month is calculated at the beginning of your car loan by the lender using a simple formula: dividing the total loan amount, including interest, by the number of months in the loan term.
The result is your monthly car payment, which is the same amount each month.
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. Paying on the principal reduces the loan balance faster, helps you pay off the loan sooner and saves you money.
Most auto loans use simple interest, a method that calculates interest monthly based on the principal amount you still owe. 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.
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.
Talk with your lender to see if they have a specific way of designating when an extra payment should go to the principal, such as marking a check box, including a note with the payment or mailing the extra amount to a different address. Also, check your loan statement to make sure your payment was divided as you expected between the principal and interest.
Since directing extra money to the principal will pay your loan off early, also ask the lender if you’ll incur any prepayment charges.
Is there a way to lower a monthly car payment?
You can choose a different loan term and possibly qualify for a lower rate, providing an opportunity to adjust your monthly car payment. You might save $25 a month, but over a 48-month term that’s $1,200 back in your pocket.
If you want to dramatically lower monthly payments, though, you’ll most likely need to extend the loan term. Before rushing to do that, know that you may actually pay more overall, due to the extra months of interest. Also, going to a longer term can leave you upside-down on your car loan — a situation where you owe more on your car than it’s worth.