Paying off a car loan not only frees up income, as you have one less monthly payment to make, but it also can help you reduce your auto insurance premiums. If you've recently made the last payment on your car loan, here's why you might be able to lower your car insurance premium -- and how to see if you can.
Choose Your Own Coverages
As long as you have a car loan, the bank owns your car, or at least a portion of it, and, therefore, is able to determine what coverages they want you to have. Once you own your car, though, you're free to choose both the coverages and limits on your auto insurance (as long as they meet your state's minimum limits). By opting to forgo some coverages and lowering your limits, you might be able to reduce your coverages.
For instance, according to CarInsuranceComparison.com, most car loan agreements require the driver to maintain certain liability, comprehensive and collision coverages. This protects the lender in case the driver totals the car. You may decide you don't need the same levels of these three coverages and lower any one of them -- or even get rid of comprehensive and collision coverage, since these aren't required by states.
Even if you want to keep the same levels of liability, comprehensive and collision coverages, you'll be able to get rid of gap insurance when you pay off your car loan without increasing your risk. Gap insurance, as Nolo explains, provides coverage for the difference between the amount you owe on your car and the actual value of your car. Once you don't owe anything on your car, you won't need this coverage since you don't have any more payments to make on it. Getting rid of this coverage alone could lower your premiums.
Improve Your Credit Score
Additionally, you'll likely improve your credit score when you pay off your car loan. Your credit score is made up of five categories, the two largest of which are the amounts you owe (30 percent of your score) and your payment history (35 percent of your score). Once you have paid off your car loan, you'll both have reduced how much money you owe and showed that you could pay off a loan. You'll have improved the two main categories used to determine your credit score and, in turn, your credit score.
Although your credit score and driving habits might seem disconnected, insurance companies don't think so. Increasing your credit score can help you get lower auto insurance rates because insurers think drivers who are financially responsible and have good credit scores are also responsible when they're on the road.
Thus, even if you're happy with your coverages and auto insurer, you should see if you qualify for lower rates simply because your credit score has improved. To get this discount, you might need to wait until your lender tells the credit reporting agencies that you have paid off your loan, but insurers should be able to take it into account as soon as it's reflected in your credit score.
Contact an Independent Insurance Agent for Quotes
To see just how much you might save on auto insurance after paying off your car loan, contact an independent insurance agent who is licensed in your state. Every insurance company will give you different rates for the coverages and limits you want, and they'll all factor in your credit score differently. An independent insurance agent can help you find out what insurer will give you the best possible deal by quickly getting quotes from lots of insurance companies in your area.