Does Paying the Principal Lower a Monthly Car Payment? - NerdWallet (2024)

FAQs

Does Paying the Principal Lower a Monthly Car Payment? - NerdWallet? ›

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.

Paying off principal can potentially save you money, but it won't lower the minimum payment per month expected by the loan company. One way you can lower your payment, however, is by refinancing your loan.

Do Large Principal-Only Payments Reduce Monthly Payments? No matter how many principal-only payments you make on a fixed-rate mortgage, your monthly payment stays the same unless you recast your mortgage. You'll end up making fewer total payments and paying off your mortgage faster.

Every payment that goes solely toward your principal builds equity in your car. As you build equity in your car, you get closer to owning it outright. It also reduces the risk of owing more than your car is worth — also called being upside-down on the loan.

Renegotiating your loan terms, refinancing or making extra payments can help lower your car payment. You can also sell your current car and buy one with a more budget-friendly payment but watch out for high interest rates. Before you buy, shop around and save for a large down payment to keep your car payment low.

Keep in mind that your actual monthly car payment won't change even if you pay extra for a period of time. You'll just repay the loan sooner and save some interest.

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.

Making additional principal payments will shorten the length of your mortgage term and allow you to build equity faster. Because your balance is being paid down faster, you'll have fewer total payments to make, in-turn leading to more savings.

Because interest is calculated against the principal balance, paying down the principal in less time on your mortgage reduces the interest you'll pay.

Any funds you pay in addition to your monthly payment amount will be automatically applied to your principal balance unless you specify otherwise.

Can you pay off a 72 month car loan early? ›

There are no legal restrictions to paying off your auto loan early but it may come with fees from your auto loan provider. Paying off a car loan early can be a good option to save money and reduce your debt, but whether it is a good idea depends on your unique financial situation.

Three major factors that determine your monthly car loan payment are your loan amount, the interest rate and the loan term. There are steps you can take — like making a down payment, improving your credit or choosing a different loan term — that can help reduce the amount you pay each month.

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.

You can reduce monthly car payments without refinancing by trading in your vehicle, selling it, or negotiating with your lender. If you want to get the lowest car payments before having a loan, compare multiple lender APRs, purchase a lower-priced vehicle, and have a larger down payment.

Your monthly auto loan payments should not exceed 10 to 15 percent of your pre-tax take-home salary. Due to increased vehicle incentives, drivers may find relief when shopping for a vehicle this year. To secure the best deal, work to improve your credit score and consider making a sizeable down payment.

If you're looking for a few tips on managing a high car payment, you're not alone. The average monthly car payment is now a record $733, according to Edmunds. And even if your monthly auto loan payments are around $500 per month, that still may be uncomfortably high.

Lower your monthly payments

As a general rule, every $1,000 in the down payment reduces your monthly payment by $15 to $18. You can use our auto loan calculator to see how various down payment amounts will affect your monthly payments.

Over time, as you pay down the principal, you owe less interest each month, because your loan balance is lower. This means that over time, more of your monthly payment goes to paying down the principal.

A larger down payment usually means smaller monthly mortgage payments. Since your loan balance is smaller, your monthly mortgage payments are smaller. Having a lower interest rate will also help keep your monthly payments on the smaller end.