Does making an additional principal payment on a car loan reduce the monthly rate or reduce the number of payments?


Welcome to Ask Clark, a column designed to answer your financial questions by financial expert Clark Howard.

Cindy from New York asks: “Does paying the principal on a car loan lower the monthly rate or lower the monthly payments?” For example, I want to pay $ 10,000 for capital. Will that do anything? ”

Clark’s take on what pays back your capital Made for your car loan

Clark says: Paying off the principal will dramatically shorten the term of the car loan.

“Almost all auto loans are calculated as simple interest loans, which means that when you pay a lump sum like $ 10,000 up front, you take away a lot of the remaining interest you would have. That $ 10,000 will never have interest again.

But Clark says someone looking to invest $ 10,000 in a car loan may have better options for their money.

“There is an interesting possibility if you are willing to invest that kind of money in the loan,” says Clark. “You might find that what works best is to go to a credit union to refinance that existing car loan into an ultra-short car loan – a few years, three years, whatever – and pay the costs. $ 10,000 for the balance as it is refinanced to keep payments affordable for you.

Learn more about the benefits of credit unions here.

To hear Clark’s full take on this issue, listen to the segment:

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If you have a question but don’t want to air, contact the Clark Consumer Action Center for free financial assistance.

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