Is it a good idea to make principal-only payments on a car loan?

Answered by Car Loans Expert Eric on March 25, 2021

Like most people, I'm trying to save money where I can. Is it a smart financial move to make principal-only payments on my car loan?

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Eric

Car Loans Expert

“If you have the money to make principal-only payments on your car loan, you could save substantial money on the amount of interest paid. However, you have many other factors to consider before deciding if this is a beneficial idea.

The first step is to consider your debt. Do you have other high-interest debt such as credit cards? If so, pay that off first. As a rule of thumb, always pay your debt off starting with the highest interest rate and work your way down.

Next, find out if your lender has prepayment penalties. If they do, making principal-only payments will always result in a loss on your end.

If you have a low interest rate — zero percent to about three or four percent — you may want to make principal-only payments. But if you can invest that extra money in something that generates a return that’s higher than your car loan interest rate, you’ll actually be making a savvy financial move.

But if your car loan interest rate is four to five percent or more, principal-only payments are the ideal way to lower the amount of interest you pay and reduce the life of the loan. “


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