What Happens If I Make an Extra Car Payment?

Car loans are a common financial commitment, often spanning several years. While borrowers typically adhere to a fixed monthly payment schedule, many desire to accelerate repayment and reduce overall costs. Understanding the implications of making an extra car payment can empower borrowers to manage their debt more effectively. This article explains the process and financial benefits of contributing additional funds to a car loan.

Understanding the Financial Impact

Making an extra payment on a car loan can significantly alter its financial trajectory. When properly applied, an additional payment directly reduces the outstanding principal balance. The principal is the original amount borrowed, and interest is calculated based on this remaining balance. By lowering the principal sooner, less interest accrues over the loan’s lifetime.

This reduction in accrued interest leads to substantial savings on the total loan cost. Car loans typically use a simple interest method, where interest is computed daily or monthly on the current principal. As the principal decreases with extra payments, the daily interest charge lessens, meaning a larger portion of subsequent regular payments goes towards the principal. Consistently reducing the principal also shortens the overall loan term, allowing the borrower to pay off the vehicle sooner.

Ensuring Proper Payment Application

To ensure an extra payment yields the desired financial benefits, confirm the funds are applied correctly. Many lenders, by default, might apply extra payments to simply advance the next due date, rather than directly reducing the principal balance. To avoid this, borrowers must specifically instruct the lender to apply the additional funds to the loan’s principal.

This instruction can often be provided through the lender’s online payment portal, which may have a specific option such as “apply to principal” or “extra principal payment.” If paying by mail, include a clear written note on the check or an accompanying letter stating “apply to principal only.” Contacting the lender’s customer service by phone can also confirm their specific procedures and ensure proper application. Before making any extra payments, review the original loan agreement or contact the loan servicer to understand their policies regarding additional payments, including any potential prepayment penalties.

Methods for Making an Additional Payment

Once the borrower has confirmed how to properly direct additional funds, executing the payment is straightforward through several common methods. Many lenders offer online portals for electronic payments. This usually involves logging into the account, navigating to the payment section, and selecting the option for an extra principal payment or specifying the additional amount. The process typically concludes with a confirmation of the payment and its intended application.

Mailing a physical check is another widely available method. When sending a payment via mail, include the loan account number on the check and any accompanying documentation. Clear instructions to apply the extra amount specifically to the principal balance should be included with the payment. This ensures the funds are processed as intended by the borrower.

Payments can also be made over the phone by contacting the lender’s customer service department. When calling, borrowers should have their loan account information readily available. Inform the representative that you wish to make an additional payment and specify that the extra amount is to be applied directly to the loan’s principal balance. This direct communication provides immediate confirmation of the payment’s application.