There's an sometime joke that says, "Why do banks have drive-thru windows? So that cars can visit their existent owners!" That's right when you accept out an motorcar loan for that fancy new car – or fancy former i – the lender that you get the loan from holds the title until the loan is paid off. One way to pay that loan off quicker is to make a "principal only" payment. Merely what exactly is that and is it a practiced idea to make one?

What is a "master only" payment?

When y'all get whatever uncomplicated-interest loan such as a car, home, or even personal loan, at that place are two parts to it: the master (the money that is loaned out) and the involvement (the additional amount that you lot pay to infringe the money). When you take out a loan, the payment goes toward the principal and the interest, and if you make extra payments on the loan, then those might go toward the interest and any other fees first.

Notwithstanding, if your lender allows y'all to make a "principal only" payment as an extra payment, and so yous will really be applying all of the money to the loan corporeality every bit opposed to some of it paying the interest as well. If your lender offers this payment pick, then it can be fabricated typically at the bank, on the phone, and possibly even online. At that place are advantages and disadvantages to making a chief-just payment.

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car loan ad outside of car dealer
USA/IDAHO Country/ LEWISTON _ two.9% for threescore months on Toyota certified used Vehicles loan advertisment at Roger Toyota auto dealer 22 Nov. 2011 (Photo BY FRANCIS JOSEPH DEAN / DEAN PICTURES) (Photo by Francis Dean/Corbis via Getty Images)

Advantages of making a master-only payment

Making a principal-only payment tin helpful in a couple of unlike means:

  • Pay off the loan faster: By making an actress payment toward the actual loan, as opposed to having some of it become captivated by the interest, y'all will pay the loan off much quicker.
  • Payless in interest: As the loan amount decreases, so does the involvement amount.

Paying actress payments toward your loan, in general, will help y'all pay the loan off quicker, just by making fifty-fifty just a few primary-only payments, you will pay the loan off even faster.

Disadvantages of making a principal-only payment

There are a couple of disadvantages to making a master-only payment:

  • Pre-payment penalty: If your lender has a pre-payment penalty attached to the loan agreement, then you lot will be charged a fee if you pay the loan off earlier than agreed upon. Equally you can guess, this defeats the purpose of paying your loan down quicker using primary-only payments because the lender will recoup some of the interest that they didn't become.
  • If y'all have other high-interest debt, such every bit credit cards, and then the interest that you're paying on those could first the coin that you volition be saving past paying your machine loan down at a quicker rate. Credit Karma advises that you pay that debt off commencement before devoting more than money toward your auto loan.

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car dealer store front
In addition to low interest loans, some car dealers, electronics stores and other merchants are using the April 1st sales tax increase to drive sales in March. A Nissan dealership in Santa Monica, March 26, 2009 advertises a zero interest loan. (Photo past Spencer Weiner/Los Angeles Times via Getty Images)

If it makes sense, then do it

The bottom line is that making principal-but payments help a lot if you want to pay your car loan off earlier, all the same, you need to make certain that it makes sense for your upkeep to practise and then. If yous can afford the extra payment, then do information technology. Simply if you need the money for other bills, then brand sure to concentrate on those first.