Making the last payment on a car loan is a great accomplishment and, for most of us, a welcome relief. But with the end of that era comes another: life as the owner of a car – “free and clear.”
Most people finance their vehicle for five years, said banker Deric Poldberg from American National Bank in Omaha, Nebraska. If you’ve just spent 60 months, give or take, with the same type of insurance, paperwork, and financial obligations, you might wonder what to do next.
Here, we break down the most common areas to address at the end of a financing term, including the paperwork and insurance details, and why you should think ahead and start saving for your next car loan.
1. Vehicle Paperwork
This part is easy in that you don’t actually have to do anything except verify information and signatures. In most states, your lien holder will notify the Department of Motor Vehicles (or equivalent state entity) of the title change, and once the paperwork clears, the title (with your name on it!) will be mailed to you.
2. Your Finances
Most people who just finished financing a car are used to sending in $300 to $500 (give or take) per month, and once that’s over, the extra cash can feel like a windfall. (Tip: If you’re making automatic payments, make sure you end them when the loan is paid off.) 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.
“Once the last payment is made on a vehicle, some financial discipline can help consumers get ahead of the game with regards to their next vehicle purchase,” said Bob Harwood, vice president Carloan.com in Richmond, Virginia. Harwood explained that people who save the equivalent of either part or all of their former monthly car payment can do their future selves a big favor when it comes to their next vehicle purchase: Put extra money in savings so you can pay a larger percentage of the purchase price upfront (which usually means you’ll get a lower interest rate on your next loan and your monthly payments will be smaller).
Remember that your credit score will also have significant bearing on your next auto loan, so it’s a good idea to keep an eye on it. You can see two of your credit scores for free, with updates every 14 days, on Credit.com.
3. Car Insurance Paperwork
Neil Richardson, licensed insurance agent and consumer adviser at The Zebra, explained what to do with your car insurance once you paid off a car loan:
- Notify your car insurance company when you’ve paid off your loan so that 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 to be totaled in a wreck, the insurance payment would go to the lien holder, but once you’ve paid off the car and own it, the payment should go to you. You’d eventually get the money in either case, but updating the information with your insurer would streamline the process.
- Your auto insurance rate won’t change all on its own just because you now own the car free and clear, but you can make the choice to adjust your coverage options (see below).
4. Car Insurance Coverage
“Most lenders require that customers carry comprehensive and collision coverage (commonly called ‘full coverage’) on their insurance policies so the vehicles are guaranteed to be repaired or replaced if damaged,” Richardson said. The reasoning is that most people don’t have enough cash to pay for the vehicle outright (which is why they are financing). Thus they are most likely not able to afford the remaining balance on their auto loan and pose a higher risk of defaulting on their loans if they don’t have that coverage.
Once you’ve paid off your loan, though, the auto insurance coverage level is up to you, as long as you meet your state’s minimum requirements. You can decline part (or all) of comprehensive and collision coverage if you decide you don’t want to have as much coverage. If you’ve just finished financing a new car, though, it’s likely to still be worth a substantial amount of money (and crashes are still, of course, a risk). A good rule of thumb, said Richardson: “If your vehicle is worth less than $4,000, you’ll likely pay more for additional coverage than the benefit you may receive at the time of a claim.”
Dropping comprehensive and collision coverage and switching to just liability coverage can significantly decrease your auto insurance payments (see page 21 of The Zebra’s State of Auto Insurance report for average national costs), but it’s important to weigh the potential costs of repairs against those savings.
Finally, you should reconsider your auto insurance at least every six months or year in order to make sure your vehicle is sufficiently covered and that you’re paying the best rate (with all applicable discounts) considering the value of your car, among other changing factors.