How to make extra principal payments and pay off your loans faster

Updated March 22, 2024  |   Published February 22, 2024

If you’re paying exactly what you have to toward your loans each month, then you’ll pay them off exactly when you are supposed to. But if you budget extra money for principal payments, you’ll pay off your debt sooner. How can you do that? You pay slightly more than your payment amount and, in turn, pay down your principal balance faster.


What is principal?

The total principal balance of your loan is essentially the amount of money the credit union lends to you. Your total monthly payment amount is made up of principal and interest payments (and sometimes taxes and insurances if it’s a mortgage). As a simple example, a breakdown of your total mortgage payment could be:

Principal – $1,200
Interest – $100
Total Due – $1,300

For a more detailed explanation, see How Your Mortgage Payment is Applied.


How do I make extra principal payments?

Any funds you pay in addition to your monthly payment amount will be automatically applied to your principal balance unless you specify otherwise. Here are some suggested approaches to making your extra principal payment.

1. Make one extra payment each year

There are a few ways you could choose to do this. One way is to calculate 1/12 of your payment amount and add that as extra funds into each of your monthly payments. By the end of the year, you will have made one full extra payment.

Another way is to double up your payment when you receive either your tax return or a year-end bonus from your employer. Of course, you aren’t limited to making only one extra payment. So, if you chose to use both and make two extra payments, you would pay off your loan even faster.

2. Round up your monthly payment to the next $100

You may have a total payment amount of exactly $565.43 for your car loan. With this method, you would round that up to $600.00 every time you submit a payment.

3. Save up and make one large principal-only payment

Set aside money in a personal savings account. Perhaps a small portion of your paycheck is directly deposited in this account each week. When you’ve saved up a good chunk of change, you could withdraw a large sum of those funds for your principal-only payment. The life of your loan would then be much shorter.


Tips for making principal-only payments

Whenever you decide to make a principal-only payment, your regular monthly payment must be satisfied first. If you make a large mortgage payment at a time other than your due date, let the mortgage servicer know it is a principal-only payment so it is applied as such, and isn’t mistaken as an early payment for the next month.


Refinance to shorten your loan length

Refinancing your loan or mortgage is another way to help you shorten your payoff time. Contrary to what you may believe, refinancing your loan to a shorter term may not make your payment amount higher. In fact, it could lower it. It all depends on what your remaining balance is, and what interest rate you are refinancing to. Check out our refinance calculator to figure out if refinancing would benefit you.