When you take out a loan, whether it be for a house, car, or personal emergency, you want to pay it off while paying as little interest as possible.
While that can feel daunting, this woman seems to have found a trick. Here’s what you need to know about loan types and how to pay off more toward your principal.
Woman Pays Auto Loan Early
In a TikTok video, content creator Taylor Martof (@taylormartof) shared that she noticed a major difference in how her car payment was applied after she submitted it earlier than usual.
“I feel annoyed with myself because I didn’t know this,” Martof says. “But apparently, if you pay your car payment, like, way on time, like, a month before it's due, most of the payment goes towards the principal, and there's only a little bit of interest that's taken out.”
Martof explains that she’s had her car for about two and a half years and often makes payments about a week early.
Since she recently got “a chunk of change,” she decided to knock out her next car payment roughly a month before it was due. When she checked the breakdown, she said far more of that payment had gone toward the loan's principal, while the amount applied to interest was much lower than she was used to seeing.
“And I was like, what the hell?” Martof said.
So, she tried it again, and nearly the entire second payment went toward the principal, while only $100 went toward interest.
“Mind you, I have a really high interest rate on my car payment right now because I didn't have good credit when I got it,” she said. “But these are the things I just wish I knew. I never knew.”
Gallery: Which U.S. City has the Worst Car Payments?
Will Paying Your Auto Loan Early Save You Money?
Not necessarily. First, borrowers need to know whether their auto loan uses simple or precomputed interest.
According to Experian, most car loans use simple interest. With this type of loan, interest is based on the remaining principal balance. Making an extra payment that reduces the principal can then reduce the amount of interest charged over the life of the loan.
With precomputed-interest loans, the lender calculates the loan's total interest at the beginning and divides it among the monthly payments. Paying extra won't reduce each month's predetermined interest charge in the same way, although Experian notes that paying the entire loan off early could lead to some savings.
What Is An Auto Loan Prepayment Penalty?
Before throwing a windfall at any debt, check the contract. Some loans include a prepayment penalty, or a fee triggered when a borrower pays off all or a substantial portion of the balance ahead of schedule, Rocket Mortgage explains.
These penalties compensate lenders for some of the interest they expected to collect. The exact rules vary by lender, loan, and local law.
How Do You Make Sure Extra Money Goes To The Principal?
Paying early and paying extra aren't always the same thing. Depending on how the lender handles the transaction, additional money could be credited toward future scheduled payments instead of immediately reducing the balance.
Axos Bank recommends confirming two things before sending extra money: that the loan doesn't carry a prepayment penalty and that the lender will apply the additional amount directly to the principal rather than future payments or interest.
‘Consider Refinancing’
In the comments section, viewers offered thoughts on Martof’s situation and shared their own loan payment habits.
“We pay early and pay like $25-50 extra a month whatever we can afford and it helps so much even that little bit extra,” a top comment read.
“If your financial situation is better now-- consider refinancing (with the same amount of time you have left on your loan now) to save a little money, especially if you belong to a credit union, they are just easier to work with,” a person said.
“Just so you know when you pay the car completely off it actually brings your credit score down a bit,” another wrote.
Motor1 reached out to Martof for comment via TikTok direct message and comment. We’ll update this if she responds.
