Does Making an Extra Principal Payment on a Car Loan Lower the Monthly Rate or Reduce the Number of Payments?

Craig Johnson | April 12th, 2021

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Welcome to Ask Clark, a column designed to answer your financial questions by money expert Clark Howard.

Does Paying Extra Principal on Your Car Loan Make a Difference?

Cindy from New York asks: “Does making a payment only toward the principal on a car loan lower the monthly rate or lessen the monthly payments? For example, I want to pay $10,000 toward the principal. Will that do anything?”

Clark’s Take on What Paying Down Your Principal Does for Your Car Loan

Clark says: Paying on the principal will significantly shorten the length of the car loan.

“Almost all vehicle loans are computed as simple interest loans, meaning that when you pay a bulk sum like $10,000 upfront, you will remove a lot of the remaining interest that you’d have. That $10,000 will never have interest again.”

But Clark says that someone looking to put $10,000 into a car loan may have better options for their money.

“There’s an interesting possibility if you’re willing to throw that kind of money at the loan,” Clark says. “You may find that what may work best is to go to a credit union to refinance that existing car loan into an ultra-short car loan — couple years, three years, whatever — and pay the $10,000 toward the balance as it’s refinanced so that the payments remain affordable for you.”

Learn more about the benefits of credit unions here.

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