What Happens When You Pay Extra on Your Car Loan Each Month?

Paying off your car loan faster can save you a lot of money in interest charges But what really happens when you start paying an extra $50 or so toward your auto loan principal each month?

I recently started doing this, so I decided to break down the details. Here’s a look at how paying extra on my car loan is impacting my loan payoff, interest costs, monthly payments and more.

How Paying Extra Lowers Your Interest Costs

The main benefit of paying extra on your car loan is saving money on interest. Auto loans charge interest on the unpaid principal balance. So the higher your balance, the more interest you’ll owe each month.

You can lower the balance faster by putting more money toward the principal. This reduces the amount of interest that accrues between payments.

For instance, let’s say you borrow $15,000 to buy a used car. The interest rate is 6% per year for five years. Your monthly payment is around $290. In the first month, you’ll pay about $75 in interest.

That first month, if you add $50 more to the principal, the balance will go down by $50. This means you’ll only have to pay $74 in interest next month instead of $75.

While $1 doesn’t seem like much, it adds up over the life of the loan. On a 5-year auto loan, paying $50 extra each month can save over $600 in interest!

How It Impacts Your Payoff Date

Paying extra on your car loan reduces the principal and saves you money on interest. This lets you pay off the loan faster.

Using the $15,000 loan example above, paying an extra $50 a month would let you pay off the loan almost 10 months early. Instead of taking 5 years to pay off, you’d pay it off in about 4 years and 4 months if you added $50 each month.

The more extra you can afford to pay, the faster you can slash your loan term. An extra $100 a month would pay off the 5-year loan in about 3 years and 9 months.

Monthly Payment Amount Doesn’t Change

One thing that doesn’t change when you pay extra is your minimum monthly payment amount. Your lender determines the payment amount based on your loan amount, interest rate and loan term.

So even if you pay extra toward your car loan principal, your required monthly payment stays the same. The extra funds simply help you pay off the loan faster.

You can always choose to increase your monthly payment if you want. But paying extra on top of your regular payment lets you pay off the loan faster without formally raising your payment.

How to Ensure Extra Funds Go to Principal

When you make extra payments, you want the funds to lower your principal directly. But some lenders will apply extra payments to interest and fees first unless you specify otherwise.

Before making extra payments, contact your lender to find out how to designate them as principal-only payments. Often you can note this on your auto loan website or write it on your payment check.

Getting written confirmation from your lender also helps ensure there are no issues with processing your principal payment correctly.

Weigh the Pros and Cons

Paying extra cash toward your car loan balance can save you hundreds of dollars in interest and pay off your auto loan years faster. But it also reduces how much cash you have available each month.

Before paying extra, make sure you have enough savings and that you’re addressing any higher interest rate debts. Paying off credit cards and other loans first usually makes more financial sense than making extra car payments.

And if your budget is tight, putting that $50 or $100 toward necessities might be smarter than paying extra on a low rate car loan. Make sure you’ve balanced short and long term needs before committing to extra principal payments.

A Look at the Impact of $50 Extra Per Month

To show the specific effects of paying $50 extra each month, let’s use a $15,000 auto loan example:

• 5 year loan
• 6% interest
• $290 monthly payment

Over the 5 year term, you’d pay about $2,600 in interest without any extra payments.

By adding $50 each month, here is what happens:

• Interest paid drops to around $2,000 – saves $600
• Loan payoff drops from 60 months to 49 months
• Total payments drop from $17,400 to $16,800

So an extra $50 a month saves almost $600 in interest and lets you pay off the loan 11 months faster. That’s a pretty solid return for a small amount of extra principal each month.

Other Ways to Pay Off Your Loan Faster

In addition to paying extra each month, here are a few other tips for paying off your auto loan ahead of schedule:

• Make biweekly half-payments instead of monthly payments
• Refinance your loan at a lower interest rate
• Use your tax refund or year-end bonus toward the principal
• Sell the car and use proceeds to pay off the loan
• Trade in your car for a less expensive used car

The faster you can increase payments toward your principal, the more interest you’ll save over the life of your loan.

Know What to Expect When You Pay Extra

Paying extra principal on your auto loan each month is a smart and relatively simple way to pay off your car faster and reduce interest costs. Just be sure to check with your lender on how to properly allocate extra payments to principal.

While paying extra won’t change your monthly payment amount, it can slash your loan term by months or even years. Carefully consider both short and long term budgets and financial goals before committing your extra funds to accelerate car loan payoff. But if you can afford it, paying extra principal is a savvy way to get out of debt faster.