What is the difference between paying interest and paying off my principal in an auto 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). Next, remaining money from your payment will be applied to any interest due, including past due interest, if applicable. Then the rest of your payment will be applied to the principal balance of your loan.

Contact your lender or loan servicer and ask questions if you want to know more about how your lender applies your payments. If you plan to pay more than your monthly payment amount, you can request that the lender or servicer apply the additional amount immediately to the loan principal. You should confirm that your payment was applied by reviewing your loan balance. However, the lender or servicer may refuse to apply the additional payment if your loan has a precomputed finance charge.

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