Should You Make Extra Principal Payments on a Car Loan?

How Paying Extra on Your Car Loan Payments Works

When you make a car payment, most lenders apply the payment this way:

1. First, the payment goes toward any outstanding fees, such as late fees.
2. Next, the payment goes toward the interest accrued since your last payment.
3. Finally, the rest of the payment goes toward your principal balance.

Extra payments are generally treated the same way, which means they may not reduce your principal as much as you want. You can find out how your lender applies extra payments by reading your loan document or contacting your lender or loan servicer.

Before making extra payments on your car loan, see if there's a way to apply the extra money directly to the loan principal. If there is, find out what you need to do to make that happen. For instance, you might need to check a box online, ask to apply the payment to principal in writing or send the payment to a different address.

You'll also want to make sure your loan doesn't have precomputed interest or a prepayment penalty, which could cancel out your interest savings from making additional payments.

Learn more: What Is a Principal Payment?

Benefits of Paying More on Your Car Payment

Making extra payments on your car loan has a couple benefits.

• You'll save money. If you have a 60-month, 72-month or even 84-month auto loan, you'll pay quite a bit in interest over the loan term. Unless your loan has precomputed interest (more on that below), extra principal payments can help reduce the total amount of interest you'll pay.
• You'll pay off your loan faster. The sooner you can pay off your loan, the faster you'll free up money for other goals, such as saving for your summer vacation or paying off credit card debt.

Drawbacks of Paying More on Your Car Loan

Making extra payments on your car loan also has some downsides.

• It reduces your available cash. Putting more money toward your auto loan leaves you with less money to pay down other debts, such as high-interest credit card debt. It could also make it harder to save for financial goals such as building an emergency fund or retirement fund.
• It doesn't always save money. Some auto loans have precomputed interest, which means the total interest was calculated and fixed based on the term of your loan. If your loan has precomputed interest, paying off the loan faster won't affect the total amount of interest you pay.

Car payment calculator

What to Consider Before Paying Extra on Your Car Loan

Before paying extra on your car loan, consider these questions:

• Does your lender let you make extra payments? Some auto lenders prohibit early repayment altogether. Others charge prepayment penalties, which can wipe out any interest savings from making extra payments. Read your loan documents or contact your lender to see what your loan terms allow.
• Does your loan have precomputed interest? If so, extra payments won't save you money on interest. You'll need to decide if paying your auto loan off faster is worth the additional payments.
• Can you afford the extra payments? If extra payments stretch your budget too far, you could have trouble paying your other bills. Missed or late payments can damage your credit score. You might also be tempted to use credit cards for everyday expenses, which could build up high-interest debt if you can't afford to pay your balances in full.
• Do you have other, higher-interest debt? Credit card interest rates, for example, are usually higher than auto loan interest rates. The average credit card annual percentage rate (APR) is 22.80%, according to Q4 2024 Federal Reserve data, while the average APR for a new-car loan is 6.35%, according to Q4 2024 Experian data. Putting extra cash toward high-interest debt such as credit cards typically saves you more money than making extra car payments.
• Is there a better use of your money? Depending on your current needs and future goals, you may have bigger priorities for your money than paying extra on your auto loan. For instance, it might be more important to build an emergency fund, save for a down payment on a home or boost your 401(k) contribution.

Learn more: Should I Pay Off Credit Card or Loan Debt First?

How Paying More on Your Car Payment Affects Your Credit

Making occasional extra payments on your car loan shouldn't affect your credit score. Paying your car loan off early could cause your score to dip slightly, but it typically bounces back in a few months.

Paying off your auto loan early could have a bigger negative impact in the following situations.

If You Have a Thin Credit File

Once your auto loan is paid off, your account will be closed. Closed accounts stay on your credit report for up to 10 years but don't affect your credit as much as open accounts do. Your credit score also factors in how long you've been using credit. If your auto loan is your oldest credit account, closing it could hurt your credit score.

Learn more: Does Paying Off a Car Loan Help or Hurt My Credit?

If It Was Your Only Account With a Low Balance

The balances on your credit accounts relative to their original loan amounts or credit limits factor into your credit scores. If your auto loan has a low balance and all your other open accounts have high balances, closing your auto loan could lower your credit score.

If You Lack a Diverse Credit Mix

Your credit mix reflects how many different types of credit you have. Having a varied mix of both installment and revolving credit can help improve your credit score. If your auto loan is the only installment loan you have, closing it early may lower your credit score.

If You Plan to Apply for Credit Soon

Even a small dip in your credit score could affect the interest rates you qualify for when you apply for credit. With a large loan, such as a mortgage, a slightly higher interest rate can mean paying tens of thousands of dollars more during the loan term. If you're preparing to apply for credit soon, leaving your auto loan open can avoid negative impacts on your credit score.

The Bottom Line

Making extra principal payments on your car loan can help you pay off the loan faster and reduce the total amount of interest you pay. However, it's important to consider your budget, other debt and financial goals to decide if making extra loan payments is the best use of your money.

Paying your auto loan off early could negatively affect your credit score in some cases. To see how your credit might be impacted, you can check your credit report and FICO^® Score^☉ for free. You can also sign up for free credit monitoring from Experian to get alerts of any changes that may affect your credit score.