According to the Consumer Financial Protection Bureau, around 2.3 million car loans originate every year. Car loans can take years to pay off. So when you finally pay it off, you might be wonderingânow what?
What happens when you pay off your car? What should you do with the money you were previously putting towards your monthly payments? Weâve got a few ideas, but keep in mind that everyoneâs finances are different. So while our suggestions might work for some people, they probably wonât work for everyone.
What to Do When You Pay Off Your Car
Firstly, paying off your car loan is a huge accomplishment. So congratulations! Paying off any loan isnât always easy. And now you finally own your car, which is a pretty big deal.
Luckily for you, the hard part is over. But there are still a few steps you should take after you pay off your car.
1. Get Your Car Title
You usually don’t have to take action for this step. In most states, your lender notifies the Department of Motor Vehiclesâor BMV or other equivalent entity in your stateâof the title change. Once the paperwork clears, the title is mailed to you.
Thereâs not much for you to do except keep an eye on the mail. If you donât get your title a few weeks after paying off your loan, call your lender. Youâll need the title if you ever want to sell your car or use it for collateral when applying for credit.
2. Reconsider Your Finances
If you’re paying off a vehicle and not planning to buy another with a new loan, youâll have a little more extra room in your budget. In 2019, new car buyers committed to an average monthly payment of around $550. So when you pay off your car loan, thereâs a good chance youâll have an extra $300 (or more) per month.
You might be tempted to splurge on fun stuff or to make large purchases you’ve been putting off. But unless your transportation situation is radically changing soon, you’ll always need a car. And that means you’ll eventually need to pay for the next one.
Plus, owning a car is expensiveâeven if youâve completely paid it off. Youâll have to your oil changed, new tires and much more. And thatâs just regular maintenance. If you get in even a minor accident, you could have a major repair expense on your hands.
Thatâs why itâs a good idea to put that some of that extra money in savings. If you end up getting a new car eventually, you can pay for all or part of your next vehicle with cash. That reduces how much you have to finance, which can significantly reduce the total cost of your next vehicle. Another option is to use the money to continue to pay down other debt to put yourself in a better financial situation in the future.
It’s also worth putting part of that cash in your short-term savings. You could easily dip into those funds if you need to get any work done on your car. But whatever you plan to do with the money, take the time to look at your personal budget. That gives you a chance to see exactly where this extra money might make the most difference.
3. Notify Your Car Insurance Company
Notify your car insurance company when you’ve paid off your loan so you can remove the lien holder from your policy. You don’t need to wait until you have the title in your hand to make the call.
This step is important because if your financed vehicle were totaled in a wreck, the insurance payment would go to the lender. Once you’ve paid off the car and own it outright, the payment goes to you.
4. Consider Any New Insurance Options
Most states have requirements for what type of coverage you must carry on your car. At minimum in most states, you need bodily injury and property damage liability that will cover the losses of other people if it’s caused in a wreck that is deemed your fault. There are some exceptions to those requirements, though.
But your lender will likely require additional insurance coverage until you pay off the loan. Many lenders require you to also carry comp and collision coverage. This is the part of your insurance policy that pays for damage to yourvehicle if you get into an accident that is deemed your fault.
Lenders require this extra coverage to protect their investment. They want to know that if your car is totaled, they can recover the value that you owe them. Once you pay off the loan, whether or not you carry this level of coverage might be your choice.
Talk to your insurance agent to find out what your options are and if you can save money by changing your insurance coverage. Just remember that if you drop this coverage and get into an accident, you may have to cover the costs of repairs or a new vehicle on your own.
You can also check rates for auto insurance online. In addition to saving money on your monthly vehicle payment, you may be able to save a lot on your insurance coverage.
Does Paying Off Your Car Loan Early Hurt Your Credit?
To get out of debt or change your current car, you might decide to pay off your car loan early. Your credit isn’t penalized by making early payments on debt. However, paying off an entire account can cause a small dip in your credit score temporarily. That’s because open accounts with a positive payment history impact your score more than closed accounts with positive payment histories.
Your wallet might also take a small hit depending on how your loan is structured. Find out if your loan includes any penalties for paying off the principle early before you make a decision to go this route.