A principal payment is a payment that a borrower makes on the amount borrowed, rather than the fees and interest on the loan, reports the Consumer Finance Protection Bureau. Typically, payments on a loan first cover interest and fees, but a borrower can make extra payments on the principal.
Regular additional principal payments along with regular loan payments reduce the overall amount of interest due, according to Bankrate. Some banks apply extra payments to accumulated interest, but borrowers can request that the additional payments be applied to the principal, states About.com. Borrowers should indicate on the payment slip that the extra payment applies toward the principal and contact the bank to ensure that the written instructions are carried out. If the interest on the loan is pre-computed rather than simple interest, the total interest due remains the same even if the borrower makes payments on the principal, according to the Consumer Finance Protection Bureau.
Not all loan servicers allow principal-only payments, reports the Consumer Finance Protection Bureau. Some banks charge a fee for any extra payments made on a loan, some charge a fee for principal-only payments and some charge a fee for paying a loan off early, states About.com. Borrowers should be aware of the loan's terms regarding principal payments and applicable fees when devising their loan payment strategies.