How to Use Principle Reduction on Car Loan

The amount you borrow for a car loan is the principal balance. Interest is charged on the unpaid balance. When you quickly reduce your principal your loan is paid off faster and you save on this finance charge. The additional amount you pay can vary, depending on what you can afford. Use an auto loan calculator to see the effect extra payments have on your car loan.

Instructions

1

Get a car-loan calculator. A car-loan calculator is an online tool used to compute different schedules and terms for auto financing. When you have all of the terms of your loan keyed into the loan calculator, you will be able to see how much you will pay in finance charges. A ca- loan calculator also helps you determine how much you can save in finance charges, and how many months or years will be reduced from the term, by reducing your loan balance.

2

Find out the terms and conditions of your loan. Take the interest rate, balance, term and monthly payment and enter them into the loan calculator. Hit the calculate button. Now click on the Show/Recalculate Amortization table button to see how much will be paid in finance charges during the term of your loan. For example, a car loan in the amount of $15,000 with an interest rate of 7 percent, for 60 months, and monthly payment of $297.02 will have finance charges of $2,821.20.

3

Determine how much extra you will pay to reduce your car loan. Once your standard monthly payment is made, a portion goes toward interest and a portion goes toward the principal balance. Any amount included with the standard payment will go entirely towards the principal balance. You can pay the extra amount weekly, monthly or some other time period that fits your budget.

4

Enter the additional amount to be paid with each monthly car payment into the loan calculator. When the amount has been entered, hit the Show/Recalculate Amortization table" button to see the new finance charges to be paid. In our example, if the amount you decide to pay is $250 you will now pay $1,392.91 in finance charges, which is a savings of $1,428.29. The loan term will be reduced by 18 months.