Ask your lender how to mark the extra as principal only, then check your statement. The Consumer Financial Protection Bureau says payments usually go to fees first, then interest, then principal, and that you may be able to ask your lender or servicer to apply more to principal. ProfitDrawer's car loan guide adds a check: after an extra $100 payment, the principal balance should drop by the full $100.
Steps:
- Read your loan documents for how extra payments are applied and whether there is a prepayment penalty.
- Ask the lender or servicer exactly how to send a principal-only payment: an online option, a note on the payment, or a separate payment.
- Pay the extra separately from your regular payment if the lender allows it, and label it.
- Check the next statement. Look at how the payment was applied. The principal balance should fall by the full extra amount.
Why it matters: if the lender treats the extra as next month's payment paid early, it does not lower the principal faster, so you save little interest.
On a simple interest loan, every extra dollar of principal cuts the interest charged from then on. On a precomputed interest loan, extra payments do not lower the interest owed, so ask your lender which type you have. Keep a log of each extra payment and the balance after it. General information, not financial advice.
Source: Is it better to pay off the interest or principal on my auto loan? (CFPB) · Updated
Tools and spreadsheets for this
Related questions
All questions on ProfitDrawer Answers →
General information, not tax, legal or financial advice. Check the rules for your state and your situation.