How to Make Principal-Only Payments on a Loan
Master the exact method for applying extra payments directly to your loan's principal, ensuring your efforts reduce core debt effectively.
A principal-only payment is an additional sum applied directly to a loan’s principal balance. This payment differs from a regular scheduled payment, which covers both principal and accrued interest. When designated as principal-only, the entire amount reduces the borrowed sum, rather than covering interest or advancing the next due date.
Understanding Principal-Only Payments
A standard loan payment allocates portions of each remittance towards principal and accrued interest. Early in an amortizing loan, a larger proportion often goes towards interest, with a smaller amount reducing the principal. As the loan matures, this ratio shifts, applying more to the principal.
A principal-only payment bypasses this typical allocation by directing the entire sum straight to the loan’s balance. This action directly reduces the amount upon which future interest is calculated. Since interest is computed on the remaining principal, lowering this balance immediately results in less interest accruing. This reduction can also lead to the loan being paid off more quickly.
Key Information and Preparation
Before making a principal-only payment, gather information and understand your loan servicer’s procedures. Review your original loan agreement or promissory note. This document may detail how extra payments are handled, including instructions for designating funds or potential prepayment penalties.
Contact your loan servicer directly to confirm their process for principal-only payments. Clarify their preferred method for receiving payments (online, mail, or phone), and inquire about specific language or codes needed for correct designation. Determine if a separate payment is required or if it can be added to a regular payment. Confirm how they provide verification and if any minimum or maximum amounts apply. Have your loan account number, full name, and precise payment amount ready to facilitate this conversation.
Executing the Payment
Once your loan servicer’s requirements are understood, you can proceed with the payment. When using an online payment portal, navigate to the payment section. Look for options like “make an extra payment” or “additional payment.” Select the specific designation for the payment, such as “principal only” or “extra principal,” or a checkbox to prevent advancing the due date. Confirm the amount and submit the payment after verifying it is marked for principal application.
For payments via mail, ensure the check or money order is made out to the loan servicer for the exact principal-only amount. Write “Principal Only Payment” or “Apply to Principal” along with your loan account number on the memo line. Confirm the correct mailing address for payments with your servicer. Sending a separate check for the principal-only amount helps ensure proper allocation.
When making a principal-only payment over the phone, state your intention that the funds are to be applied solely to the loan’s principal balance. Provide your loan account details and the exact payment amount, and ask for confirmation that the payment will be processed as principal-only. Some servicers may require specific phrasing or internal codes, identified during your preparation. Confirm the representative understands your request to prevent misapplication of funds.
Verifying and Monitoring
After making a principal-only payment, confirm its correct application to your loan. Review your subsequent loan statements to verify the payment was applied entirely to the principal balance. Look for a direct reduction in the principal amount and ensure no portion of the extra payment was used to cover interest or advance your next due date. Most statements detail how payments are allocated.
If the payment does not appear correctly applied, contact your loan servicer. Provide specific payment details, including date, amount, and any confirmation number. Explain the discrepancy and request reapplication of funds as intended. Periodically review your loan’s amortization schedule or online principal balance. This monitoring allows you to observe the cumulative effect of your principal-only payments and track the reduction of your outstanding loan amount.