Imagine being able to pay off your loan faster than the set deadline. This may seem like a dream, but if you can pay -- and your lender accepts -- only pay the principal, this is possible. Paying only the principal is a way to shorten the loan period and save interest. If your lender allows it, you can borrow the money directly from you - the principal - to pay extra money, which can help you pay off the loan faster.

Let's take a closer look at how you can pay the principal, the benefits of doing it, and what you need to consider before making an extra payment to the lender.

Payment method that only pays the principal

When you make a loan, your monthly income will be used for both principal and interest. The principal is the money you borrowed. Interest is the money you pay for borrowing money. If you pay extra money, it may pay any fees and interest first. The rest of the money will be paid to your principal. However, if you specify an additional loan payment as a payment for only the principal, then the money will be paid directly to your principal - assuming the lender accepts a payment that only pays the principal.

How to pay the principal

Paying only the principal may not be as easy as simply sending extra money to your lender. Some lenders do not provide the ability to pay only the principal. To find out if you have this option, call your lender and ask if and how to pay only the principal.

If the lender only allows the principal to be paid, make sure you understand the process and check that your payment is applied correctly. Some banks allow you to open a check and mark it as "principal only". Some banks may require you to enter a branch, or -- or more conveniently -- allow you to pay only the principal on the Internet or on the phone. Even better, some lenders may automatically use any additional payments for your principal balance.

Benefits of only principal payments

There are two benefits to paying only the principal.

Pay off the loan faster

Put more money on the principal, you can usually pay off the balance faster and shorten the total loan term.

Less interest

Paying only the principal can reduce the total interest on the loan. When you pay off your loan balance, interest on the balance is usually reduced.

Only paying the principal consideration

Depending on your loan terms and financial situation, paying only the principal may not make sense to you. There are two things to consider here.

Prepaid fine

Early repayment fines may undermine the purpose of paying only the principal. If you repay the loan in advance, some lenders may charge an early repayment penalty to recover a portion of the interest they receive from you over the life of the loan.

The amount of prepayment reimbursement and how they work may vary from lender to lender. But usually, once you have paid off the entire principal balance in advance, or if you pay off most of the loan at once, the early payment penalty will take effect. Paying only the principal here may not result in a prepayment penalty. Check with your lender to confirm if your loan has a prepayment penalty and, if so, how to work for your particular loan.

Other debts with higher interest rates

For example, if you have other debts with higher interest rates on your credit card, it might make more sense to pay off these debts before repaying the principal low-interest personal loans or car loans. This can help you save interest.