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Congratulations! Paying off a loan is a huge accomplishment. Between the monthly payment and the interest you’ve been paying to the finance company, this means substantial money back in your pocket. When paying off a car loan, there may be some extra benefits beyond the monthly payment and interest savings that you’ll want to take advantage of.

So, what happens when you pay off your car? Here we’ve covered the steps you’ll need to take to make the most of your new car-loan-free status.

How to get your title after paying off a car loan

One of the first questions you may have is, “I paid off my car. How do I get my title?” Getting your title is the first step you’ll need to take after paying off your car.

The wonderful part about getting possession of your car title is that you typically don’t have to do much except pay off your car! It is that simple.

When you financed the car, the financing company became the lien holder on the title. The car title is documentation showing proof of who owns the vehicle. Since they loaned you the money for the car, they legally own the vehicle until you pay them back. That’s only fair, right?

If you’ve now paid off that loan, the financing company will consider the lien satisfied and will notify the Department of Motor Vehicles (DMV). Depending on your state, you may need to follow up with the DMV to find out if you need to do anything to transfer the title, but in most states, when the financing company releases the lien, the title will be put into your name and mailed to you.

Once you get the title, don’t leave it on the countertop with your other mail! This is a very important document that should be stored somewhere secure and preferably fireproof and waterproof.

Key Takeaways

  • Once you pay off your car, the financing company will inform the Department of Motor Vehicles.
  • You may need to find out from the DMV what you need to do to transfer the title in your state.
  • After you get the title, contact your car insurance company to remove the lienholder and to reassess your coverage.
  • Once you tell your insurance company, the next step is to think about your budget again. If you already have one, now is a good time to update it.

What to do about your car insurance

The next step after getting your title is to contact your car insurance company. They need to know about your loan payoff for two important reasons: to remove the lienholder and to reassess your coverage.

Remove the lienholder

Your insurance company will need to know that there is no longer a lien on your car title. They may request to see proof of the lien-free title but then will remove the financing company as the lienholder on your policy.

This is an important step because if you are in an accident and there is an insurance payout, you will want that payout to come to you, not the financing company.

Reassess your coverage

Let’s get the bad news out of the way first: you still need insurance coverage even though the car is paid off. Car insurance is a legal requirement in nearly every US state. But, even if it weren’t a legal requirement, driving without insurance puts you at risk of significant financial loss and hardship. Car insurance only seems like an unnecessary cost until you have an accident and need it. In other words, adequate car insurance coverage is your friend.

The great news is, now that you’ve paid off your car loan you may be able to reduce your coverage levels and put some of that money back in your pocket. Most financing companies require that you have full coverage while you are paying on the loan. But now that the loan is paid off, it is time to reassess your coverage.

When to consider dropping full coverage

Whether reducing coverage after paying off your car loan is a possibility or not depends on the value of the car and your personal financial situation. As a general rule, the Insurance Information Institute recommends that full coverage may not be cost-effective if your car’s actual cash value less than 10 times the insurance premium.

Another way to put it is, if your annual premium for full coverage is 10% of the actual cash value of your car, you may want to consider dropping full coverage. For example, let’s say you live in California, your annual full coverage auto insurance premium is $1518 and your vehicle has an actual cash value of $8,000. Using this rule of thumb, having full coverage may not be cost-effective.

You might also consider dropping full coverage if you have large emergency savings and are confident you have adequate money to pay for any needed replacement or repair.

When to consider keeping full coverage

But there are other things to consider, too. Your financial situation is an important factor in deciding what kind of auto insurance coverage you need. The above rule only works if you have enough emergency savings or other assets to cover your costs if something were to happen. If you do not have the money readily available to pay for things like accident repairs, it may be worth it to pay a bit more premium for full coverage than to end up with coverage that is inadequate.

If you decide not to drop full coverage, consider speaking with your insurance agent about the possibility of reducing coverage limits. If it makes sense to drop coverage limits, you may be able to save some money after all. And don’t forget, even if you cannot reduce your auto insurance cost now that you’ve paid off your loan, you still have the monthly car loan savings to look forward to.

Why you need to rethink your budget

Whether you’ve been able to reduce your auto insurance costs or not, you’re still newly car-payment-free! That means all the money you were spending on your car payment each month can now be used elsewhere. But where?

The next step after notifying your insurance company and reassessing coverage is to rethink your budget. If you don’t have a budget, now is a perfect time to create one. Whether you use a spreadsheet or a budgeting app, a budget is a critical tool for financial health. If you already have one, now is an important time to update it.

One of the leading principles of budgeting is to give every dollar you earn a job. Are we saying you should spend every dollar you make? No, definitely not. The “job” you give to each dollar may be to go into your savings account, to pay on a high-interest credit card, or to save for a wedding. The car payment you are now saving is no exception. What can you do with that money each month now to strengthen your financial position?

If you have other debts, we recommend using your former car payment to pay those debts down faster starting with the debts with the highest interest rates. Then focus on building up an emergency fund and putting money toward something you’ve been saving for. This is a great choice to have! Whatever you decide, be sure you are putting these new savings each month to good use.

What to expect with your credit

The final step after paying off a car loan is to check in on your credit. You can request a free overview of your credit through Credit Karma, or if you have a credit card, many card providers offer free credit monitoring.

If you monitor your credit report regularly, don’t be surprised if you see a bit of a score decrease after you’ve paid off your car loan.

Yes, that seems like the opposite of what should happen, but remember that your credit score is made up of many different factors. Credit utilization, number of accounts, type of accounts, and age of oldest credit are only a few of those factors.

Credit reporting agencies look at your available credit, the type of credit it is, as well as how much of it is being utilized. When you pay off an installment loan like a car loan, but still have high balance credit cards which are considered revolving debt, it may result in a negative impact on your credit utilization and credit mix.

Another reason you may see a decrease in credit score is if your car loan was your oldest credit account. Let’s assume the car loan you got five years ago was your oldest credit account, then two years ago got your first credit card. Before you paid off the car loan, your oldest credit account was five years old. Now that you’ve paid off the car loan, your oldest account is two years old. This can cause a decrease in your credit score.

While the effect to your credit should be minimal after paying off a car loan, it will depend heavily on your individual credit situation. In other words, the effect on your credit will likely be different than it would be to someone else’s. But don’t worry. Your credit score will recover, especially if you employ some credit strengthening techniques and distribute your car payment savings onto high-interest debts that may be driving down your score.

Final thoughts

Paying off a car loan takes perseverance, diligence, and often many years of sacrifice. Congratulations on accomplishing this goal! Once you have gotten your title and reassessed your car insurance coverage, it is time to decide how you will make the best use of that extra money in your pocket each month.

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Ashlee Tilford


Ashlee, a former managing editor, insurance, at QuinStreet, is a journalist and business professional. She earned an MBA in 2014 with a concentration in finance. She has more than 15 years of hands-on experience in the finance industry.