Paying extra
Extra payments go straight to the balance, so a little more each month can cut months and interest from a loan.
Each car payment covers two things: the month's interest and a piece of the balance, called principal. Interest is charged on what you still owe, so early in the loan, when the balance is highest, more of each payment goes to interest. As the balance falls, more goes to principal. That's amortization.
Take $30,000 at 7% for 60 months, about $594 a month. In the first month, about $175 is interest and about $419 pays down the loan. By the last payment, the interest is only a few dollars.
Money you pay on top of the regular payment, applied to principal, goes straight to the balance. A smaller balance means less interest next month, so more of your regular payment goes to principal too. The effect builds on itself.
On that same loan, adding $100 a month pays it off in 50 months instead of 60 and saves about $970 in interest. You don't have to be perfect, either. Paying extra in most months and skipping when money is tight still brings the payoff date forward. The planner on this tab shows both.
A few practical checks:
- Ask your lender how to apply extra to principal. Some apply it to the next payment instead unless you say otherwise.
- Check for a prepayment penalty. Many auto loans don't have one, but confirm yours.
- Keep an emergency fund first. Money paid into a loan is hard to get back if you need cash.