Q

Does car insurance go down when a car is paid off?

A

No, paying off your car doesn’t reduce your insurance rates, but it does give you more control over the type and amount of coverage you have, which can help you save money on your insurance rates.

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By

Rachael Brennan

Rachael Brennan

Property and Casualty Insurance Expert

Rachael Brennan is a senior insurance editor at Policygenius, specializing in auto insurance. She worked for 21st Century Insurance, BlueCross BlueShield Massachusetts, and HealthPass New York. She also spent two years working as a content expert for dozens of auto insurance websites through 360Quote LLC.

Published September 3, 2021|3 min read

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Your car loan is finally paid off. Congratulations! Paying off your car loan is a momentous occasion, but can it save you money on car insurance?

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Unfortunately, no, paying off your auto loan doesn’t reduce your insurance rates, but it does give you more control over the type and amount of coverage you have, which can help you save money on your insurance.

Key Takeaways

  •  Car insurance rates don’t automatically go down when you pay off your car

  • Once you no longer have a loan on your car you don’t have to carry comprehensive or collision coverage

  • When you no longer have a loan, you no longer need to pay for gap insurance

I paid off my car loan. Now what happens to my insurance?

Once your car loan is paid off, your first call should be to your insurance company. When you had a loan, your lender was listed on your insurance policy as a lienholder. If your car was totaled, your lienholder would get reimbursed by your insurance company before you got a check for any remaining part of the payment. Now that you no longer have a lienholder, it is important to remove them from your insurance policy.

After your lienholder has been removed from your policy, you can review the coverage with your insurance agent to make sure it still meets your needs — for example, you may want to increase your deductible. Don’t be surprised, however, when your insurance rates don’t go down just because you paid off your car loan.

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How can I get cheaper insurance now that my car is paid off?

Car insurance rates don’t automatically go down when you pay off your car, but you can still save money on your car insurance by making some changes now that you no longer have a payment due.

1. Update deductible amounts

Lienholders typically require drivers to have full coverage (meaning comprehensive and collision coverage) with deductibles no higher than $500, though this amount can change from company to company. Once you no longer have a car loan, you can choose to increase your deductibles to lower your annual insurance rate.

Keep in mind that a higher deductible means you are responsible for paying more out-of-pocket for a claim, so if you can’t afford to pay $1,000 for a car repair you shouldn’t raise your deductibles to $1,000.

2. Cancel unnecessary coverages

There are some coverages that you may not need once you pay off your car loan. For example, gap insurance is coverage that pays off the difference between your car loan and the amount you get from your insurance company in the event of a total loss. Now that you no longer have a loan, you no longer need to pay for gap insurance.

Mechanical breakdown insurance (MBI) is coverage that can help pay to fix your car if you have an unexpected repair after your warranty expires. This could be valuable, but it typically isn’t available for vehicles that are more than a few years old or have 100,000 miles or more. If you’ve had your car for more than a couple of years, it might be worth thinking about whether or not MBI is useful to you now that your loan has been paid off.

If my car is paid off do I still need comprehensive and collision coverage?

Technically no, once you no longer have a loan on your car you don’t have to carry comprehensive or collision coverage. However, depending on your financial situation and the value of your vehicle, you may want to keep your comprehensive and collision coverage to make sure you are protected financially.

Collision insurance provides coverage if:

  • You are in a collision with a stationary object, like a tree or a telephone pole

  • You are in a single-car accident where your car rolled or tipped over

  • You are in a collision with another vehicle and it was your fault

  • You are in a collision with another vehicle and they were at fault, but they are uninsured or underinsured

Comprehensive insurance provides coverage if:

  • Your car is stolen

  • Your car is damaged by vandalism, fire, or riots

  • Your car is damaged by falling objects (rocks, tree limbs, etc.)

  • Your car is damaged in a storm (hail, wind, floods, lightning, earthquakes, etc.)

  • Your car is damaged by an animal (hitting a deer, rodents chewing through wiring, etc.)

  • Your car has windshield or glass damage

If you aren’t financially prepared to pay to repair or replace your car in the situations listed above, you should keep your comprehensive and collision coverage in place.

Do I get a gap insurance refund if my car is paid off?

Gap insurance refunds are only available for policies that were paid in full up-front and the refund is only for time you’ve paid for but no longer need because your loan has been paid off. Drivers don’t get refunds just because they never filed a gap insurance claim.

If you think you are owed a refund for an overpayment of gap insurance, reach out to your insurance agent so they can help you get any money you are owed.

Frequently Asked Questions

Should I let my insurance company know the car loan is paid off?

Yes, you should tell your insurance company once your loan has been paid off, but don’t expect to see a change in your rates simply because you no longer have a lienholder.

Should I switch to liability only coverage?

If the value of your car is low enough or you are financially comfortable replacing your car out-of-pocket in the event of an accident, you can choose to switch to liability only coverage. This isn’t a requirement though, so if you feel more comfortable having full coverage you aren’t required to cancel it just because your loan has been paid off.

Is car insurance cheaper if you own the car?

No, owning your car outright won’t change your insurance rates. It does open up more choices for insuring your car, including higher deductibles and the option of a liability only policy, which could help lower your rates.