An official website of the United States Government
Auto loans

What is the difference between paying interest and paying off my principal?

Generally, any payment made on a loan will be applied first to any fees that are due (for example, late fees). Next, remaining money from your payment will be applied to any interest due, including past due interest, if applicable. Lastly, any remaining money from your payment will be applied to the principal balance of your loan, including past due principal, if applicable. Principal is the money that you originally agreed to pay back while interest is the cost of borrowing the principal.

Contact your loan servicer to verify their policies and procedures for applying payments, as these can vary from servicer to servicer. If you plan to pay more than your monthly payment amount, you can request that the servicer apply the additional amount immediately to the loan principal. However, the servicer may refuse if your loan was precomputed.

Can't find your question? Ask us!

Submit a question