What's Principal on a Loan?

Principal is the money that you originally agreed to pay back. Interest is the cost of borrowing the principal. Generally, any payment made on an auto loan will be applied first to any fees that are due (for example, late fees). ... Then the rest of your payment will be applied to the principal balance of your loan.

Is it better to pay the principal or interest?

1. Save on interest. Since your interest is calculated on your remaining loan balance, making additional principal payments every month will significantly reduce your interest payments over the life of the loan. ... Paying down more principal increases the amount of equity and saves on interest before the reset period.

What happens when you pay extra principal on a loan?

When you pay extra payments directly on the principal, you are lowering the amount that you are paying interest on. It can help you pay off your debt much more quickly. ... Other banks will give you the option of applying the entire amount directly to the principal of the loan no matter when you make it.