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If you've recently made your last car payment, congratulations! You've achieved a significant financial milestone. Getting rid of that monthly payment means you should have more money in your bank account each month. But does paying off your car lower your car insurance premiums?
The short answer is maybe, but not necessarily. While paying off your loan gives you more flexibility with your insurance choices, it doesn't automatically mean lower rates.
Let's look at the factors affecting your premiums and coverage needs and explore ways to lower your insurance costs on a paid-off vehicle.
Key takeaways
- When you finance your car, the lender has a legal interest and will often require you to carry additional insurance.
- Paying off your car loan removes the lender's insurance requirements, but your insurance coverage doesn't automatically change.
- To lower your insurance costs after paying off your car, you can drop guaranteed asset protection (GAP) coverage, which is only necessary if you have a loan, and carefully consider dropping collision and comprehensive insurance.
- Factors such as your driving history, location, and coverage amounts play a significant role in the cost of car insurance.
How car loans impact your car insurance
When you finance a car, you don't actually fully own it. As the lienholder, the lender who provides the financing for you to buy the vehicle has a legal interest in it. You don't get full ownership of the car — and, in most states, receive the title — until you've paid off the loan.
To protect its investment, the lender may require you to carry more car insurance than the state minimum coverage you must have. Most states require all drivers to carry at least bodily injury and property damage liability insurance. However, lenders may also require you to carry comprehensive, collision, uninsured/underinsured motorist, and GAP coverage to protect their investment.
While these coverages help protect the lender, they also protect you from paying too much out-of-pocket if your car gets damaged or totaled in an accident. Many of them are good to have, regardless of whether you lease, finance, or own your vehicle outright. However, these additional insurance coverages can significantly increase your insurance premium costs.
Required car insurance for financed vehicles
Here are descriptions of the types of car insurance coverages that your lender might require beyond the state minimum liability coverage:
- Comprehensive coverage: This covers most non-collision damage to your car, such as damage from weather, fire, theft, and animal-related accidents (i.e., if you hit a deer).
- Collision insurance: This covers damage to your vehicle in an accident, regardless of who is at fault. It also covers single-vehicle accidents, such as if you run into a guardrail.
- GAP insurance: This insurance protects you if you owe more on your vehicle than it's worth. If you total your car, GAP coverage makes up for the difference between your remaining loan balance and your car's actual cash value.
- Personal injury protection (PIP): This coverage helps pay for medical bills, lost wages, or funeral costs if you or your passengers are injured or killed in a car accident, regardless of who was at fault.
- Uninsured/underinsured motorist insurance: This coverage protects you if you're involved in an accident with a driver who lacks adequate insurance coverage.
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What happens when the car loan is paid off?
When you pay off your car loan, the lender will send you a lienholder release, giving you sole ownership of the vehicle. Once this happens, you're free to change your car insurance coverage to lower the cost of your premiums.
Your insurance policy doesn't change automatically, but you'll have more control over your coverage choices. This doesn't necessarily mean you should drop all coverages that your state law doesn't require. If your car is still valuable, it may be wise to keep full coverage to protect you if you're involved in an accident.
You can drop GAP insurance once you no longer owe a loan balance. However, you may still want comprehensive and collision coverage, especially if your car is less than five years old or has less than 100,000 miles.
You can lower your premium costs and keep collision and comprehensive coverage by increasing your deductible. While you'd pay more out-of-pocket if you're in an accident, it won't be as much as if you didn't have the coverage.
Other factors impacting your car insurance rates
Paying off your car may help you lower your premiums, but there are other factors affecting car insurance costs, including your:
- Driving record: A clean record leads to lower rates, while accidents and tickets can increase rates.
- Age and gender: Young drivers, seniors, and males usually pay more for car insurance.
- Location: Living in high-traffic or high-crime areas can increase your insurance costs.
- Vehicle type and features: Sports cars and high-end brands can cost more to insure, while cars with advanced safety features may qualify for discounts.
- Policy options: Higher deductibles and lower coverage limits can reduce your premiums, but they also increase your out-of-pocket costs if you need to file a claim.
- Credit score: Depending on your state and car insurance provider, a higher credit score can lead to cheaper premiums than a lower one.
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Ways to get cheaper insurance after paying off your car
Want to lower your car insurance costs now that you've paid off your loan? Try these tips that can help make even the best car insurance more affordable:
- Cancel your GAP insurance: This coverage is unnecessary since you no longer have a loan.
- Revise your coverage: Consider whether dropping comprehensive or collision coverage makes sense based on your car's value and replacement part costs.
- Reassess your deductibles and coverage limits: Raising your deductible or lowering your coverage amounts can decrease your premiums, but be sure you can afford the out-of-pocket costs if you need to file a claim.
- Look into policy bundles and discounts: Many insurers offer discounts for bundling policies like your home and auto insurance. They also may offer discounts for maintaining a clean driving record, installing safety features, or getting good grades as a high school or college student.
- Shop around for a cheaper insurance policy: You should research and get quotes from other car insurance companies at least every year or two. Comparing quotes from different insurers for similar policies can help you find the best rates.
FAQs
Should I tell my insurance company that my car is paid off?
Yes, you should tell your insurer that you've paid your car off when the time comes. While your insurance company won't automatically lower your rates, it will remove the lienholder on the policy. This gives you more flexibility to change the coverage and possibly save money.
Does car insurance go down when the car is paid off?
Your car insurance won't automatically go down when your car is paid off. But you may be able to reduce your premiums by taking several steps, including dropping GAP insurance, increasing your deductibles, lowering your coverage amounts, eliminating or reducing collision and comprehensive coverage, or getting a new insurer.
However, before you take these steps, look at your finances to figure out if you can afford to pay higher out-of-pocket costs if you decide to make changes to your coverage. Changing insurers could also make you lose any loyalty discounts you might have had.
Is it worth having full coverage on a paid-off car?
Whether it's worth it to have full coverage on a paid-off car depends on several factors. If your vehicle is older than 5 years and not worth much, you might drop comprehensive and collision coverage to save money on car insurance. However, if the car is still valuable, and you don't have the money to pay for expensive repair costs, keeping full coverage may be worth it.
Bottom line
Paying off your car loan is a milestone you should celebrate. You'll be able to pursue your financial goals and have more money to spend on other things without that monthly car payment. You may also be able to save some money on your car insurance because you might not need as much coverage as you had when you were still making payments.
However, proceed cautiously before making significant changes to your car insurance coverage. Closely look at your coverage amounts, deductibles, and potential out-of-pocket expenses before you drop comprehensive and collision insurance. There may be other ways to save money, such as taking advantage of discounts and switching insurers. Using the right strategy, you can get the best deal and still thoroughly protect your vehicle.
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