Do My Insurance Premiums Go Down When I Pay Off My Car?

Last Updated on September 22, 2019

Most people think their car insurance automatically decreases as soon as the car is paid off.  In most cases, this is true. In certain situations, the auto insurance rate reduction drops quite dramatically after the vehicle is paid off.  At a bare minimum, paying off a vehicle provides a little more control over the cost of insurance and coverage levels. Let’s take a closer look at why insurance premiums decline when an automobile is paid off.

Insurance Required by the Lienholder

do my insurance premiums go down when i pay off my loanAuto loan lenders have a lien against vehicles as payments are made.  In other words, the driver does not completely own the vehicle until the loan is paid in full.  The financing company typically mandates the driver carry a specific minimum amount of collision and comprehensive insurance for the vehicle.  In most cases, it is impossible to obtain vehicle financing without such insurance. The result is higher insurance premiums. However, once the auto loan is paid in full, the lienholder does not have any influence over the insurance coverage.  At this point, it is possible to drop the collision and comprehensive coverages, keeping strictly the liability coverage and enjoying lower auto insurance rates. Unfortunately, dropping these coverages altogether to save some money might not be prudent.

Comprehensive coverage is available for damage unrelated to crashes.  Collision coverage provides reimbursement for damage to the vehicle resulting from collisions. If the automobile is not worth much, dropping or lowering some coverages or portions of coverage might make sense.  If your vehicle is particularly expensive to repair, these coverages will likely come in handy. Be sure to review all potential accident scenarios with your auto insurer before committing to a certain level of insurance.

The Issue of Depreciation

If you plan on paying your lien to save money on car insurance, reach out to your auto insurer right away after the lien is settled.  You just might find the vehicle is worth less after years of wear and tear and consequently cheaper to insure than immediately after purchase.  Though there are exceptions to the rule, in general, most new vehicles are comparably expensive to insure. Some auto insurers won’t apply the depreciation reduction until customers speak up and request it.  So don’t be shy. You have done your part by paying off your car loan. You should reap the benefit in the form of lower auto insurance premiums.

It makes sense for the insurer to charge less to insure a vehicle that has aged a couple years as opposed to one that is brand new.  As is often said, vehicles depreciate in value the moment they are driven off the lot. Add in all the wear and tear from driving 10,000 miles or more per year and the vehicle really is worth that much less after a couple years.  So don’t continue paying through the nose for car insurance. Be proactive, pay off your auto loan, raise the issue of depreciation with your insurer and shop around for the best rate.

How to Proceed After Paying off Your Car Loan

If you have paid off your vehicle or are nearing your final payment, take a moment to reflect on this accomplishment.  You now officially own your vehicle. It is now time to remove the lost/payee additional interest from the auto insurance policy.  There is no need to worry about any payments but for insurance. If the vehicle is fairly new, you will likely benefit from keeping all of the coverages in place.

As noted above, it is possible to remove comprehensive and collision coverage to ensure your vehicle remains physically protected.  Those looking to reduce costs will be tempted to drop the aforementioned coverages. Collision coverage is best used sparingly as it is typically classified as an at-fault accident, meaning your insurance rate will spike following the claim.   The challenge lies in figuring out if the vehicle’s value is worth the auto insurance premium necessary to insure it. You can gauge the value of your automobile through the Kelley Blue Book or NADA. Do not hesitate to pick up the phone and contact your auto insurance agent.  Find out how much more it will cost to add physical protection to the automobile before making a commitment.

If you determine the vehicle’s value is less than the premium, it might make sense to remove the coverage.  If the difference between the two falls on the side of maintaining coverage, give some consideration to increasing the deductible.  This way, the premium will decrease yet you will pay more out-of-pocket following an accident. The downside to this approach is there is that much more financial responsibility if it is necessary to file a collision or comprehensive claim.

James Shaffer
James Shaffer James Shaffer is a writer for and a well-seasoned auto insurance industry veteran. He has a deep knowledge of insurance rules and regulations and is passionate about helping drivers save money on auto insurance. He is responsible for researching and writing about anything auto insurance-related. He holds a bachelor's degree from Bentley University and his work has been quoted by NBC News, CNN, and The Washington Post.
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