This article explains how to make extra payments toward your loan principal, how those payments are applied, and what to expect when setting up recurring principal-only payments.
Table of Contents
- What Is Principal?
- What Is an Extra Principal Payment?
- How to Make an Extra Principal Payment
- Setting Up Recurring Extra Payments
- How Extra Principal Payments Impact Your Loan
- Important Things to Confirm
What Is Principal?
Principal is the original amount borrowed on your loan.
Each standard loan payment typically includes:
- A portion toward interest
- A portion toward principal
The principal balance is what interest is calculated on. As your principal decreases, the amount of interest charged over time also decreases.
What Is an Extra Principal Payment?
An extra principal payment is any payment made in addition to your required monthly payment that is applied directly to reduce your loan balance.
This payment does not replace your scheduled payment — it is applied on top of it and reduces your outstanding principal immediately.
Example:
- Required monthly payment: $2,000
- Extra principal payment: $500
- Total paid that month: $2,500
The additional $500 reduces your principal balance directly.
How to Make an Extra Principal Payment
Extra principal payments are typically made through:
- Your online loan servicing portal
- A one-time ACH bank transfer
- A scheduled recurring ACH withdrawal
When submitting an extra payment, it is important to ensure the payment is designated as:
“Principal Only”
If not specified, lenders may:
- Apply the funds toward future scheduled payments
- Apply the funds toward accrued interest
Setting Up Recurring Extra Principal Payments
You may choose to set up recurring extra principal payments in addition to your regular monthly payment.
When configured as recurring:
- Funds are automatically withdrawn from your bank account each month.
- The withdrawal occurs on the scheduled date you select.
- The recurring payment continues until modified or canceled.
For example:
- Regular auto-payment: $2,000
- Recurring extra principal payment: $500
- Total monthly withdrawal: $2,500
How Extra Principal Payments Impact Your Loan
Making extra principal payments can:
- Reduce your loan balance faster
- Lower the total interest paid over the life of the loan
- Shorten your repayment term
- Improve your loan-to-value (LTV) ratio
Because interest is calculated based on your remaining balance, reducing principal earlier results in less interest accruing over time.
Important Things to Confirm Before Making Extra Payments
- Is the payment clearly marked as “principal only”?
- Is the payment one-time or recurring?
- On what date will recurring withdrawals occur?
- Can you modify or cancel recurring payments?
If you are unsure how extra payments are applied to your specific loan product, please contact support before submitting recurring principal payments.