How to Make a Principal-Only Payment

Making additional payments on a loan can significantly impact its overall cost and duration. A principal-only payment is a strategic approach that involves sending extra funds directly to the loan’s principal balance, separate from your regular scheduled payment. This method helps borrowers reduce the total interest paid and potentially shorten the loan term, offering a distinct financial advantage.

Understanding Principal Payments

A principal-only payment is an extra payment specifically designated to reduce the outstanding principal balance of a loan. Regular loan payments typically consist of both principal and interest, with a larger portion often going towards interest in the early stages of an amortizing loan. By making an extra principal payment, the entire additional amount directly lowers the money you originally borrowed, rather than covering accrued interest or future payments.

This direct reduction of the principal balance decreases the amount on which future interest is calculated. Since interest is generally computed on the remaining principal, a lower principal balance means less interest accumulates over time.

This strategy can lead to substantial savings on total interest paid over the life of the loan and can also shorten the overall loan term. Principal-only payments are applicable to various common loan types, including mortgages, auto loans, student loans, and personal loans.

Preparing to Make a Principal Payment

Before making a principal-only payment, it is important to review your loan documents carefully. These documents may contain specific terms regarding extra payments, including any potential prepayment penalties. While such penalties are uncommon for most consumer loans, confirming their absence ensures a smooth process.

Gather essential account information. You will need your loan account number, the exact name associated with the account, and the lender’s contact information. Determine the specific amount you intend to pay towards principal. A quick review of the lender’s website or frequently asked questions section can provide general guidance on their extra payment policies.

Methods for Making a Principal Payment

Several common methods exist for submitting a principal-only payment.

Online Payment Portal

Many lenders offer an online payment portal where you can directly initiate the transaction. This involves navigating to the payment section, selecting an option like “extra principal” or “principal-only,” entering the desired amount, and confirming the payment. Look for specific checkboxes or fields that clearly indicate the payment’s intended application.

Phone Payment

You can also make the payment over the phone by contacting your lender’s customer service. When speaking with a representative, explicitly state that you wish to make an additional principal-only payment for a specific amount. This clear communication helps ensure correct application.

Mail Payment

If you prefer to send a payment via mail, such as a check or money order, clearly label it. Write “Principal Only” or “Apply to Principal” in the memo line of the check or on an accompanying note, along with your loan account number. For all payment methods, ensure the payment is designated only for principal to prevent misapplication to future interest or escrow.

Verifying Your Principal Payment

After submitting a principal-only payment, verify its correct application. Check your online loan account statement within a few business days, as payments typically reflect within 24 to 72 hours. Look for a direct reduction in your principal balance that precisely matches the amount of your principal-only payment. This confirms the payment was not mistakenly applied to future interest or held as a credit.

If you receive mailed statements, examine the next statement for the same principal balance reduction. Many lenders also provide a confirmation email or digital receipt after an online or phone payment, detailing how the payment was applied. If the payment is not reflected accurately or as intended, contact your lender’s customer service department with your confirmation details to resolve any discrepancies.