Extra Payments on Auto Loans: Save Money and Pay Off Faster

How Extra Payments Work

Most auto loans use simple interest, which means interest accrues daily based on your payoff balance. When you make a payment, the lender first applies it to the interest that has accrued since your last payment, and the remainder goes toward the principal. If you pay extra, that extra amount goes directly to the principal, reducing the balance on which future interest is calculated.

This principal reduction is what makes extra payments powerful: you save interest over the life of the loan and may pay off the loan sooner. However, extra payments do not lower your monthly payment amount unless you refinance or recast the loan. Your regular scheduled payment remains the same; you simply reduce the principal faster.

• Extra payments reduce principal after covering accrued interest.
• Lower principal means less interest accrues each day.
• Your monthly payment amount stays the same unless you recast the loan.

Sources: Consumer Financial Protection Bureau, Grow Financial Federal Credit Union

Biweekly vs. Monthly Extra Payments

Biweekly payments involve paying half your monthly payment every two weeks. Because there are 52 weeks in a year, that works out to 26 half-payments, or the equivalent of 13 full monthly payments per year. That's one extra monthly payment each year, which can accelerate your payoff and save interest compared to a standard monthly schedule.

A typical example: For a $20,000, 60-month auto loan at 5.5% APR, the monthly payment would be about $382. A biweekly plan would save approximately $289 in total interest compared to making standard monthly payments. However, the exact savings depend on your loan terms and the timing of payments.

• Biweekly: 26 half-payments = 13 full monthly payments per year.
• The extra payment goes directly to principal, reducing interest and term.
• Savings vary by loan amount, rate, and term.

Sources: Infinity Calculator, RateGenius

Example: $50 Extra per Month

Even small extra payments can make a noticeable difference. Consider a $20,000 auto loan with a 6% interest rate and a 60-month term. The regular monthly payment is about $387. If you add an extra $50 each month, you’ll pay off the loan about 8 months early and save roughly $280 in interest. This is a straightforward way to reduce the total cost of your car without a big budget change.

• Adding $50/month to a $20,000, 6%, 60-month loan shortens the term by about 8 months.
• Total interest savings are approximately $280 in this scenario.

Sources: NerdWallet, Casa Kia of El Paso

Impact on Total Interest

The more you pay extra, the more interest you save. Two examples from the research illustrate this. On a $42,000 loan at 6.35% APR for 60 months, paying an extra $100 per month reduces total interest from about $7,130 to $6,211, saving $919, and shortens the loan by 7 months. On a $30,000 loan at 6% for 60 months, an extra $100 per month cuts the payoff time to 50 months and saves around $800 in interest.

• $42,000 loan, 6.35%, 60 months: extra $100/mo saves ~$919 and 7 months.
• $30,000 loan, 6%, 60 months: extra $100/mo saves ~$800 and 10 months.

Sources: Bankrate, NerdWallet

Potential Prepayment Penalties

Some auto loans include a prepayment penalty, which is a fee you must pay if you pay off the loan early. However, most auto loans today do not have one. It’s essential to check your loan agreement or ask your lender to confirm whether your loan has any such penalty before making extra payments or paying off the loan early.

• Prepayment penalties are rare in modern auto loans but not impossible.
• Review your loan contract or contact your lender to verify your terms.

Sources: Infinity Calculator, Bankrate

How to Allocate Extra Payments

When you make an extra payment, be sure to specify that you want it applied to the principal, not to future monthly payments. Some lenders may automatically apply extra amounts to principal, but it’s a good habit to indicate your intention. If you’re making the payment online, look for a field that lets you note “principal only” or “extra to principal.” You can also contact your lender to set up a principal-only payment method.

• Direct extra payments to the principal balance to maximize interest savings.
• If not specified, a lender may apply the extra amount to your next due payment instead.

Sources: Bankrate, Greater Texas Credit Union

How Auto Loan Payoff Works

When you pay off an auto loan early, the lender calculates the payoff amount, which includes the remaining principal plus any interest accrued up to the payoff date, and any applicable fees. With simple interest loans, you only pay interest for the time you actually have the loan, so paying it off early reduces the total interest. However, with precomputed interest loans, the total interest is calculated upfront and does not decrease, so early payoff may not save interest.

• Simple interest: you pay interest only for the time the loan is outstanding.
• Precomputed interest: total interest is fixed, so early payoff may not reduce interest.
• Request a payoff quote from your lender to know the exact amount.

Sources: Consumer Financial Protection Bureau, NerdWallet

extra payments on principal

Every extra dollar you put toward the principal reduces the balance on which daily interest is calculated. This compounding effect means the earlier you make extra payments, the more interest you save. Over the life of the loan, even small amounts can cut months off your repayment schedule.

• Principal reductions lower daily interest accrual.
• Early extra payments have a larger cumulative effect than late ones.

Sources: Consumer Financial Protection Bureau, Grow Financial Federal Credit Union

Bi-Weekly Payment Strategy and How to Implement It

To implement a biweekly payment strategy, you pay half your monthly payment every two weeks instead of one full payment per month. This can be done manually, or you may be able to set up automatic biweekly payments with your lender. The key is that you end up making 26 half-payments per year, which equals 13 full payments, giving you one extra payment annually. That extra payment goes toward principal, accelerating payoff and reducing interest.

• Divide your monthly payment by two.
• Schedule payments every two weeks, either manually or automatically.
• Confirm your lender applies payments as scheduled and tracks the extra principal.

Sources: Infinity Calculator, RateGenius

Rounding Up Payments Scenario

Another simple strategy is to round up your monthly payment to the nearest $50 or $100. For example, if your payment is $386, you might pay $400. That extra $14 or more per month goes directly to principal. Over time, these small increments can add up to significant savings, similar to the extra $50 per month examples above.

• Rounding up adds a small additional principal payment each month.
• Set up automatic payments to make rounding up painless.

Sources: Greater Texas Credit Union

Lump-Sum Payments and When to Use Them

Lump-sum payments, such as a tax refund, bonus, or other windfall, can be applied directly to your auto loan principal. This can dramatically reduce your balance and save interest. It’s generally a good idea to use a lump sum for your car loan if you don’t have higher-interest debts and you have an emergency fund in place. By reducing your principal, you shorten the loan term and reduce total interest.

• Use unexpected cash to pay down principal and eliminate the loan sooner.
• If you have emergency savings and no higher-interest debt, lump sums are a smart use for your car loan.

Sources: Bankrate

Comparison of Payoff Strategies with Example Numbers

To help you decide which extra payment strategy might work for you, compare the following scenarios based on a $20,000 loan at 6% APR for 60 months. Note that these are examples and your savings may vary.

Sources: RateGenius, Casa Kia of El Paso, NerdWallet