Does Paying Off a Car Lower Insurance?

Paying off a car loan relieves a big financial burden, but what happens to your car insurance when you pay off a car? Here’s what you need to know whether paying off a car loan will lower your insurance costs.

Does paying off a car loan early affect car insurance?

Paying off your car loan does not directly lower your car insurance costs. The ownership status of your car isn’t typically calculated as a risk factor for your insurance premium. However, paying off a car loan will change your coverage requirements, which could result in saving some money. 

In states where insurers are permitted to use credit scores for rating insurance policies, maintaining a strong credit history can help you get the best rate. Paying your bills on time, including your car loan, can improve your credit score and lower insurance rates. 

How do car loan payments affect insurance?

When you finance a car, you borrow money from a lender like a bank and your ownership is subject to a lien. The certificate of title will be in your name, but it will also name the lienholder. In most cases, the lienholder will hold onto the certificate of title until the loan is paid off.   

During this time, make sure you’re meeting the lender’s minimum car insurance requirements. Failure to do so could be a breach of your loan agreement.  

When you’ve paid off your debt, the lender will release the lien and return the certificate of title to you.  

A lender will require certain coverages as a condition of your loan. You’ll typically be required to carry comprehensive and collision coverage, which pay for damage to your car. A lender requires these insurance coverages because they have a financial interest in the vehicle until the loan is paid off. Insurance helps ensure they will get paid back if the car is damaged.  

If your car is totaled in an accident, or is stolen, comprehensive and collision will first pay your lienholder the outstanding amount of the loan or lease, and anything left after the lienholder is paid, will be paid to you. This protects both you and the lender by ensuring you won’t be on the hook for the remaining amount you owe on the loan, and the lender will recover their financial investment.  

Factors affecting car insurance costs and how they work

One of the major factors that affect your car insurance premium are the kinds of coverage you carry and their limits or deductibles. An insurance policy is made of several different coverages that pay in different situations. Limits are the maximum amount of money an insurer will pay up to in the event of a claim. A deductible is what you pay before your insurance company will start providing coverage for expenses. 

Each state has their own minimum insurance requirements. If an insurance company sells a policy to you, it must include at least the state-mandated coverages and limits. 

A typical car insurance policy covers bodily injury liability and property damage liability. In some states they must also provide personal injury protection (PIP) for medical and related expenses. Coverage for damage to your own vehicle is not required by state statute, however, in most cases it is required by the lender as a condition of a loan. 

This means that if you pay off your car loan, you are no longer required to carry comprehensive or collision coverage. However, it’s still a good idea to carry these coverages even after your loan is paid off. 

When you should adjust coverage

While it’s smart to maintain coverage for damage to your vehicle, there are situations where it may no longer make financial sense to do so.

If your car’s value diminishes enough, it may not be worth carrying comprehensive or collision coverage on it, especially when factoring in your deductible. Removing these coverages can lower your car insurance costs. 

As an alternative to dropping coverage, consider raising your deductible. Your deductible is your share of the repair costs after an accident. A higher deductible means lower premium, but higher out-of-pocket costs in the event of a claim.  

Conclusion – Does paying off a car loan lower insurance?

Paying off your car loan doesn’t necessarily mean your car insurance costs will go down. Once you pay off a car, you could drop coverages that were required by your lender like comprehensive and collision. Removing these coverages can lower your car insurance premium but you’ll have to pay for repairs to your car out-of-pocket. It’s still a good idea to carry these coverages even after you’ve paid off your car.