Principal-Only Payments: Are They a Good Idea?

What Is a Principal-Only Payment?

A principal-only payment is a payment made directly toward the amount you borrowed — not the interest. This kind of payment reduces your loan balance faster and can help you save money on interest over time.

Normally, when you make a loan payment, part goes toward the principal (the original loan amount) and part goes toward interest (the cost of borrowing). With high-interest debt like credit cards, most of your monthly payment often goes toward interest, not principal.

When you make a principal-only payment, the full amount goes directly toward paying down the loan balance. These payments are usually made in addition to your regular monthly payments.

Making extra payments toward the principal can help you:

• Pay off debt faster

• Save money on total interest

• Possibly boost your credit score (especially if you reduce your credit utilization on credit cards)

This strategy is especially helpful for high-interest debt like credit cards. For example, if your card has a 27% APR, even small extra payments can make a big difference over time because you’re reducing the amount that future interest is based on.

You can also make principal-only payments on lower-interest loans like car loans or student loans. While the impact may not be as dramatic, it can still help you save and pay off the debt sooner.

What Are the Pros and Cons of Principal-Only Payments?

Making principal-only payments can be a smart way to save money and pay off debt faster. By reducing your loan balance directly, you’ll pay less interest over time and shorten the life of the loan.

But there are some downsides to consider. Some lenders charge a prepayment penalty — a fee for paying off your loan early. If your loan has this type of penalty, making extra payments might cost you more than it saves.

To decide if principal-only payments are worth it, you’ll need to compare the cost of the penalty with the interest you’d save. If you’re dealing with a high interest rate, it may still be worth paying the penalty to be free of the debt sooner. But if the penalty is high and the interest rate is low, sticking to the regular payment schedule might save you more in the long run.

The best choice depends on your loan terms and financial goals.

Lenders and Principal-Only Payments

Not all lenders allow principal-only payments, and the way your extra payment is applied can vary. Some lenders, especially mortgage lenders, do offer the option to make extra payments directly to the principal, but this usually comes with specific instructions or requirements.

If your lender doesn’t clearly allow principal-only payments, then any extra money you send might be split between interest and principal. Or it may even be applied toward future payments instead of reducing your loan balance.

Before sending an extra payment, it’s important to check with your lender. Ask if they accept principal-only payments and what steps you need to take to make sure your payment is applied the way you intend. Some lenders may require you to label the payment clearly or submit it separately from your regular monthly payment.

Also, watch out for prepayment penalties, which some loans include. These fees can reduce or cancel out the savings from paying down your debt early.

Know the Fine Print on Prepayment Penalties

Some lenders charge a prepayment penalty if you pay off your loan earlier than scheduled. This is more common with certain mortgages, auto loans, and private student loans, but most credit cards don’t have this kind of fee.

Lenders may include a penalty to make up for the interest they lose when a loan is paid off early — especially if the loan is paid off soon after it’s taken out, like through a refinance. For example, if you pay off a 30-year mortgage in just 10 or 15 years, the lender may charge a fee to offset the lost interest.

If your loan includes a prepayment penalty or doesn't allow for principal-only payments, it may be worth contacting your lender. In some cases, they may be willing to work with you, especially if you're a longtime or reliable customer.

How To Make the Most of Extra Payments

If your lender allows principal-only payments with no penalties, using extra cash to pay down one debt at a time can help you get ahead faster.

One popular approach is the debt snowball strategy, where you focus all extra payments on one loan (often the smallest balance). Then, once it's paid off, you roll that payment into the next debt. This creates momentum and helps you stay motivated.

Free online tools can help you track your progress and stay organized. The key is to avoid getting stuck in a cycle of minimum payments and instead take control of your debt, one step at a time.

This strategy can improve your credit over time and speed up your journey toward financial freedom. Once your debts are paid off, you can start using that money to reach other goals, like building savings or planning for retirement.

Another Approach: Pay Off Loans Faster With Bi-Weekly Payments

If making an extra monthly payment feels like too much, bi-weekly payments might be a good alternative, especially for mortgage loans. Instead of paying once a month, you pay half of your regular payment every two weeks. Since there are 52 weeks in a year, this adds up to 13 full payments instead of 12.

That one extra payment each year can significantly shorten your loan term. For example, a 30-year mortgage could be paid off in about 22 years with this approach.

Bi-weekly payments may also work for other loans, like car or personal loans, depending on your lender. Just make sure to ask how your payments will be applied.

This strategy can be especially helpful if you're paid every two weeks, since it matches your paycheck schedule and helps you chip away at your debt faster.

Let’s Summarize...

Making principal-only payments can help borrowers pay off their debts faster and save money on their loans over the long term. Some lenders do not permit this, while others charge a prepayment penalty of some kind to those who pay off their loans early. Borrowers should contact their lenders to see if they can get these penalties waived as a courtesy if their lender charges them. 

Making bi-weekly payments is also a good idea, although your lender most likely won’t automatically credit an extra payment made each year solely to the principal. Bi-weekly payments are most common with mortgage loans, but “extra” payments can also be made with other types of loans as well.