Once you pay off your car loan, take these four steps to make sure your car title, credit, insurance coverage and budget are ready for the road ahead.
You did the hard part: You paid off your car loan. The “no car payment” life has immediate and obvious benefits, but youll also want to take four important steps to ensure youre on the right road going forward. Once you pay off your loan, take a moment to make sure your title, credit, insurance coverage and budget are up to date and in order. Heres how to move forward now that your loan is behind you.
Paying off your car loan is an exciting milestone! You’ve reached the final lap in your auto financing journey. Now it’s time to cross the finish line and reap the rewards of being a car owner free of monthly loan payments.
I know you’re probably wondering – what’s next after making that last payment? Don’t worry, I’ve got you covered. In this article, we’ll walk through the step-by-step process of what happens when your auto loan balance hits zero.
Get Your Title
First, get someone to sign over the title to your car to you alone. The lender put a lien on the title when you first bought the car with a loan. They were interested in the car financially because they loaned you money to pay for it.
You need to get rid of the lien and change the title to your name only now that the loan is paid off. This legally shows you as the outright owner.
Contact your state’s DMV to begin the title transfer process. They’ll explain the specific documentation required in your state. Most of the time, the lender needs to send the DMV a lien release letter. This proves that the loan has been fully paid off so that the lien can be taken off.
Once the DMV has the letter, they will issue you a clean title without any lender listed Depending on your state, this can take anywhere from 2 weeks to 2 months. Be patient, the newly printed title will arrive eventually!
Check Your Credit Report
Another impact of paying off your loan is a change to your credit report. The positive payment history of your auto loan remains on your credit report for 10 years. This demonstrates your ability to successfully repay installment loan debt.
The auto loan balance, on the other hand, is taken off of your list of current debts. This immediately lowers your credit utilization ratio. It can lower some people’s credit score by a few points for a short time.
I recommend checking your credit report a month after paying off your car. Verify that the auto loan shows a $0 balance and the account status says “closed – paid in full”. If you notice any errors, submit a dispute letter right away. Getting inaccuracies corrected quickly prevents dings to your credit.
Evaluate Car Insurance Needs
Now is an excellent time to reevaluate your auto insurance coverage! As a car owner, you are no longer obligated to carry the minimum insurance required by your lender.
Consider if you still need comprehensive and collision coverage. The older your car is, the lower its actual cash value becomes. At some point, the premium cost outweighs the likelihood of getting a decent payout if your car is totaled. Dropping these optional coverages can save you money each month.
You can also increase your deductibles to lower your premiums. Just be sure you have an emergency fund to cover the larger out-of-pocket cost if you do file a claim. A chat with your insurance agent can help determine the right balance of coverage and cost.
Adjust Your Budget
This is arguably the most exciting part – adjusting your budget to account for not having a monthly car payment! You likely have an extra $200 to $700 each month now.
There are many great ways to allocate these newfound funds:
- Build up emergency savings
- Pay down high-interest debt
- Invest for retirement
- Start a college fund
I recommend using the money to work toward your biggest financial goals. An easy option is to automatically transfer your old car payment amount into a separate savings account each month.
Celebrate and Plan Ahead!
Be sure to celebrate this milestone – you deserve it! Paying off a car loan takes years of diligent payments. Give yourself a pat on the back.
Then, start thinking about your next vehicle purchase. In the years ahead, you can direct all those former car payments into savings. This gives you a big head start on the down payment for your next car.
Paying off your auto loan is extremely gratifying. You’ll immediately enjoy the cash flow benefits and freedom from debt. With some strategic planning, you can also leverage it to strengthen your finances for the long-term. So savor the accomplishment – you earned it!
Get Your Car Title
Your cars title documents legal ownership and lists any lienholders (like your lender) who have a financial interest in your car. Once youve paid off your car loan, your cars title should reflect that youre the sole owner. Depending on how titles are handled in your state, your lender may transfer title to you at the end of your loan or be removed from your title as a lienholder.
- How do you get an updated title? Your states department of motor vehicles (DMV) and your lender largely determine the process. In some cases, your lender automatically notifies the DMV that your loan is paid and the DMV sends you a new title. In other instances, you must obtain paperwork from your lender and submit it to the DMV, in person or electronically. Check the DMV website in your state and/or contact your lender for details on how to proceed.
- Why do you need a new title? Your title should reflect your vehicles correct legal ownership. If you want to sell your car at any point, only having an old title that lists a lienholder could complicate the sale.
- How long does it take to get a new title? If your state handles title transfers electronically and your lender moves quickly, you could receive a new title in a few weeks. The more manual intervention (and U.S. mail) required, the longer the process is likely to take. The important thing is to make sure the wheels are in motion: Contact your lender if they havent reached out with information about transferring title within a week or two of paying off your loan.
Look Into Different Insurance Coverage Options
Once your loan is paid in full, you can remove your lender from your insurance policy. Additionally, you may want to review your coverages now that your lenders insurance requirements no longer apply.
Lenders may require minimum liability as well as collision and comprehensive coverages to protect against loss and damages to your vehicle while your loan is in force. Lowering your liability coverage and/or removing collision and comprehensive coverage will lower your rate, but first consider what makes sense for you financially. Although some car owners forgo collision and comprehensive coverages as their vehicles age (and the likelihood of recouping their full value seems less certain), you may still find this protection worthwhile.
This might be a good time to review your coverage needs from scratch. If youd like help, contact your current insurance company or talk to an insurance agent. Once you have a clear idea of your policy needs, you can compare policies and rates by reaching out to multiple insurance companies or using an online insurance marketplace, like Experians auto insurance comparison tool.
What happens AFTER you Pay Off Your Car?!
FAQ
What happens after you fully pay off a car?
It means you now fully own your car, says Julie Shinn, vice president of lender management at RateGenius. “Once you’ve paid off your auto loan, you’ll have a ‘free and clear’ vehicle title.” “Any time there are ownership changes, you have to update the title. ” In some cases, you can transfer your title electronically.
What to do when a car is fully paid off?
You will often either need to request from the financing company that a letter confirming your vehicle has been paid off or they will automatically mail you the letter so that you can provide it to your insurer so they can remove the financing company from your policy as they’re no longer a lienholder.
Is it smart to fully pay off a car?
It’s not a bad idea — you can save money by paying off your car loan early. But it’s not the best choice for everyone, especially if you don’t have an emergency fund. You can pay less interest if you pay your car off ahead of schedule, but make sure to tell the lender to put the extra toward your principal.
Do you have to get a new title when you pay off your car?
Yes!Once you’ve settled the outstanding balance with the auto lender, you should request the title deeds. The title is the collateral therefore this debt is known as a secured debt unlike credit cards which are unsecured debts.