Getting rid of high-interest car loan The Debt Adviser by Steve Bucci • Bankrate.com

Dear Debt Adviser,
How can I get rid of the principal on my car loan quicker? The interest is killing me! Is there such a thing as interest-only payments when it comes to car loans?
-- Jasmine

Dear Jasmine,
Stop, stop! You're making me crazy. If you want to lower the principal on your loan, the last thing you would want is an interest-only loan. Interest-only loans are usually associated with mortgages and, as the name implies, pay only the interest amount due on a loan and do not lower the principal at all. Because a car depreciates each month, interest-only loans can put you upside down (owing more than the car is worth) fast.

There are two ways to get you right-side up and out of debt sooner:

Let's look at refinancing first. It's the iffier proposition. That's because used-car rates are higher than new-car rates, so you may get quoted a higher rate than the one you now have. It makes sense only if your credit score was so bad when you first got the loan that even the used-car rate is better than what you now have. You can compare auto loan refinancing rates using Bankrate's auto loan search engine.

If you decide you want to pursue refinancing, I suggest you get a copy of your credit reports and your credit score. Check your reports (it's free) to be sure all the information is accurate, that it is yours and not out of date. Getting your credit score, which is the three-digit number distilled from your credit reports, will enable you to shop for better interest rates. Don't forget to check your local credit union or AAA for rates. They may have an edge because credit unions don't pay taxes, which lowers their lending costs, and AAA can use its volume to get good rates for its members.

Paying extra principal is more likely to work for you, but there are some things you need to keep in mind when paying additional principal amounts on any loan, auto or otherwise.

First, look at your loan documents to determine if your loan carries any prepayment penalties. If your loan does carry this clause, you may be on the hook for all the interest due under the original contract, even if you pay it off sooner.

If your loan does not have a prepayment clause, be sure to communicate to your lender that you want the additional payment amount to be applied toward the principal amount of the loan. This is best done by sending two checks each month, one for the regular payment and the other one clearly marked that it is to be applied toward the principal. This will clarify your wishes beyond a doubt, as opposed to one check with an additional amount added on. If you don't, they might just apply the extra money to your next month's loan payment.

But where can this extra money come from if you are already under pressure from your current payment? I have a couple of suggestions for you. First, look closely at your spending, and see if there are areas in which you can cut back until you have this loan paid off. Second, use some money you don't have yet. By this I mean the next time you get a raise or windfall (such as a tax refund) promise yourself you will apply half of the amount to the car loan. Promising only half makes it more likely you will keep your promise than promising all of it.

Good luck!

The Debt Adviser, Steve Bucci, is the president of Money Management International Financial Education Foundation and the author of Credit Repair Kit for Dummies. Visit MMI for additional debt advice or to ask a question of the Debt Adviser go to the "Ask the Experts" page and select "Debt" as your topic.