Supercharge Your Debt Payoff Strategy with Principal-Only Payments

If you’re serious about paying off debt faster, you’re in the right place. You’ve probably heard about debt payoff strategies, like power payments, refinancing, or consolidating. Another effective strategy that can really level up your payoff game is principal-only payments.

Not only can principal-only payments help you pay off your debt faster, but they can also save you a surprising amount of money on interest over time. Ready to learn more? Let’s dive in!

What are principal-only payments?

Principal-only payments are exactly what they sound like — payments that go straight toward the principal balance of your loan. Typically, your monthly loan payment is split between interest (what the lender charges you to borrow money) and the principal (the actual loan balance). To level up your debt-payoff strategy, you’ll need to continue to make your minimum monthly payments and supplement with a principal-only payment, every dollar of which directly reduces your loan balance.

Why does this matter? When you chip away at the principal balance directly, you’re not just lowering the amount you owe, you’re also reducing the amount of interest that accrues on that balance over time. The less principal you owe, the less interest you’ll pay, meaning more of your hard-earned money stays with you.

Benefits of principal-only payments

Here’s why principal-only payments are such a smart move when it comes to paying off debt:

• Reduced interest costs: By paying down the principal balance, you’re reducing the total amount of interest that will be calculated. In the long run, this can save you hundreds (or even thousands) of dollars, depending on your loan terms and interest rate.
• Faster debt repayment: If you’re paying more toward the principal, you’re going to pay off your debt faster. Let’s say you have a $5,000 student loan and make an extra principal-only payment of $100 every month, that extra payment is going straight toward the balance, which means you’re shaving months — or even years — off your repayment timeline.

How to make principal-only payments

Ready to make principal-only payments part of your strategy? Here’s how:

1. Check your loan terms. First, review your loan documents or talk to your lender to confirm that you can make principal-only payments. Not all lenders allow this, or they might have specific rules about how extra payments are applied. If you have a Virginia Credit Union loan, you can select “principal payment” under “payment type” when making a loan payment in online banking.
2. Contact your lender. Sometimes lenders automatically apply extra payments to the next month’s payment rather than toward the principal. To avoid this, contact your lender and specify that you want any extra payment to go straight to the principal balance. You might have to do this each time, but many lenders let you set up this instruction for all future payments.
3. Set up a payment plan. Once you’re clear on how to make principal-only payments, set up a schedule. You could aim for monthly extra payments, or use any extra cash you have from windfalls (like tax refunds or bonuses) to make additional principal-only payments. Keep in mind that this payment is in addition to your regularly scheduled monthly payments per your loan agreement (which hopefully you already have automated).

Tips for making principal-only payments work for you

You may be thinking, “But where do I find the extra cash for principal-only payments?” Here are some ideas that could make a big difference, even if you’re working with a tight budget:

• Automate small extra payments. Even if you can’t make a huge principal-only payment every month, automating a small extra amount can really add up over time. Consider adding an extra $25, $50, or whatever you can swing to each monthly payment. Those small contributions will steadily chip away at your balance.
• Use windfalls wisely. Receive a tax refund, a birthday gift, or a bonus from work? Consider putting it toward your principal balance. This is an easy way to make a big dent in your debt without disrupting your regular budget.
• Budget for extra payments. Even with a modest income, small adjustments in your budget can make space for an extra principal-only payment. Putting these savings directly toward your loan can speed up your payoff timeline.
• Increase payments as your income grows. If you get a raise or pick up a side gig, channel some of that extra income directly into principal-only payments. Your earnings can make a big impact on your debt reduction.
• Snowball into your principal-only payments. Do you have extra money in your budget from a previous monthly payment? Snowball these extra funds directly into your principal-only payment. Learn more about this power payment strategy to debt payoff here.

How principal-only payments can supercharge your payoff timeline

Let’s take a look at a quick example to see how much of an impact principal-only payments can have.

Imagine you have a $10,000 loan with a 5% interest rate and a five-year term.

Without principal-only payments: Your monthly payment would be around $188, and you’d pay about $1,322 in interest over the life of the loan.

With an extra $100 principal-only payment: You’ll pay off the loan almost two years faster and save around $660 in interest.

With an extra $50 principal-only payment: You’ll pay off the loan almost a year and a half faster and save around $340 in interest.

This example shows how even modest principal-only payments can make a huge difference in your payoff timeline and save you money in interest costs.

Using principal-only payments is a simple but powerful way to speed up your debt payoff journey. By applying even small extra amounts directly to your loan’s principal balance, you can reduce the total interest you’ll pay, shorten your repayment period, and get one step closer to financial freedom.

Debt repayment can feel overwhelming, but supplementing your payoff strategy with principal-only payments can put control back in your hands. Even if you’re only able to make small principal-only payments at first, remember that every dollar counts. Your future self will thank you!