Paying Down Car Loan Principal

The principal on a car loan is the actual amount of money that you borrowed from the lender. It does not include the interest or any other charges, it is simply the amount of money the lender gave to you to purchase the car plus any other options you may have rolled into the loan. For example, if you take out a car loan for $10,000 and you purchase other options for $500, the $10,500 is your principal and the interest is the amount of money you will pay the lender for the right to take out the loan.

Now when you make your monthly car payment, part of the monthly car payment will go towards interest and part of the monthly car payment will go towards principal. The earlier you are in the car loan, more of the payment goes towards interest than it does to principal. The reason is that as you pay down principal on the loan, less of the loan remains to be repaid and since the interest for each month is a certain percentage of the principal that you still have left to pay, there is less interest to be paid and therefore more of the monthly payment can be applied to principal.

To speed up the rate at which you pay off your car loan, you should make your normal monthly car loan payment plus some extra money that you should specify to the lender as being for the principal. Unless you communicate to the lender that you want the additional payment to be applied to the principal, the lender will apply that money to future interest payments. I would recommend that you send in two checks, making it clear that one check is for the normal monthly car loan payment and one is to be applied to the principal. Doing this should eliminate any confusion and put you on your way toward paying off the car loan faster.