Does paying off my car lower my insurance?

Paying off a car may lower your insurance payments. When financing a vehicle, you’re required to carry the level of coverage requested by the lender, which may be more than you want or need. Once you pay off your car and own it outright, you can adjust your coverage and reduce your car insurance costs. Enter your ZIP code below to see how paying off your car lowers your insurance.

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Tonya Sisler has a Bachelor’s Degree from the University of South Carolina in Journalism and has worked for 15+ years in management. She has also completed a proofreading certification and is currently a professional writer.

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Brad Larson has been in the insurance industry for more than a dozen years. He started out as a claims adjuster for a national carrier. He has since switched to the agency side of the business. Brad is licensed in all P&C lines.

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Reviewed by Brad Larsen
Licensed Auto Insurance Agent

UPDATED: Oct 26, 2020

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Things to know...

  • When you’re financing a vehicle, the insurance company requires you to carry full coverage insurance
  • The full coverage insurance helps protect the borrower and also the lender when the car is damaged in a loss
  • If you pay off the principal and the interest on the loan, you don’t have to satisfy any lender requirements
  • Paying off your car doesn’t automatically lower your car insurance rates but it could if you make policy changes
  • You can remove comprehensive and collision to lower your rate but don’t do that without researching your choice

If you take a look at all of the newer cars coasting down highways and public roads in your area, a majority of those vehicles are financed. In fact, consumer reports show that around 84.5 percent of all of the new cars that are purchased today are financed. While it would be nice to have the cash to buy a car, it makes the best financial sense for most middle-class buyers to work with a lender to buy a car as opposed to spending their savings.

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Your goal as a borrower is to find the best possible deal so that you can pay off your loan as soon as possible. The end goal is always to own your car outright while it is still operable and has some useful life left in it. Financed cars cost more to insure because of lender requirements. If you’re about to pay off your car, here’s how it might benefit you in terms of your premiums:

You Must Insure Any Car That You Own


Insurance is just one of those things in life that you can’t avoid when you own a car. While not all forms of insurance are required by law, auto insurance is one of the few products that are mandatory. Since it’s a state-mandated requirement, you have to obey the law or pay the price. Knowing the requirements is key before you buy a car at all.

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Why does it cost more to insure a financed car?

You have to buy insurance on all cars, regardless of how the car is purchased. If you pay cash, finance the car, or lease the car, you’ll be expected to buy the same level of insurance under the state law. Unfortunately, you have a whole different set of requirements to fulfill if you’re entering a contract with a finance company.

The main reason that it costs more to insure a financed car is that you have to carry more than just the state requirements.

The state only cares if you carry liability insurance or protection that pays for medical bills when people are injured in a crash.

There’s really no concern when it comes to paying for the car of the at-fault driver. The state might not care if someone who is negligent has money to pay for their vehicle repairs but the lender does.

Technically speaking, the vehicle is still titled in the finance company’s name until you pay it off. Since it’s the lender’s property, they want to be sure that car can be repaired if anything happens. As a form of protection, all lending contracts state that the borrower must maintain full coverage insurance.

What is full coverage insurance?

Full coverage policies don’t pay for everything that happens. There will always be gaps in the protection that you purchase simply because insurance policies have built in exclusions. The full coverage policy pays for damage to your car in addition to your liability coverage. The types of coverage that are added when you select the ‘full coverage’ box include:

  • Comprehensive – a first-party vehicle coverage that will repair your car or even replace it after fire, theft, vandalism, flood, storm, landslide, or other related damage
  • Collision – a first-party vehicle coverage that will repair your or even replace if after a collision with another vehicle or object

How much will full coverage cost you?



Every single coverage that you select on your policy has its own premium. The only way that you are given a total premium is after all of the individual premiums are added up. If you’re paying for a full coverage plan, you’ll have a separate premium for comprehensive and collision.

There’s no telling how much you’ll pay for the comprehensive and collision coverage until you get a quote. The actual premiums for any coverage that you carry are dependent on several factors. Your age, location, driving record, and the type of vehicle are all going to play a role in your insurance expenses.

On average, out of the 73 percent of car owners who buy full coverage, the average policyholder pays $308 for collision and $143 for comprehensive.

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Does your rate go down right when you pay off your loan?

Paying off debt is a cause for celebration. It’s a major financial milestone in your life to go from borrowing money to owning property. After you’re done celebrating the fact that you’ve made your last loan payment, you should call your insurer and update your policy.

The first thing that you’ll do is remove the lender as the loss payee on your policy. Once the loss payee is removed, they won’t receive any more notifications about your policy and they won’t be entitled to a claims payment when you file a claim. Removing the loss payee probably won’t have any effect on your overall rate.

When will your car insurance go down?

It’s not paying off your car that lowers your car insurance, it’s changing the coverage that you carry. You don’t always want to get rid of comprehensive and collision just because you’re no longer required to carry it. Sometimes, your car has enough value to keep the protection.

It just depends on what the car is worth now and how much you’re willing to keep paying for coverage. There’s no way to tell if you’re going to have an accident.

Having full coverage will really pay off if you do have one, but you will be spending hundreds a year on the coverage you don’t need if you never have a loss.

If you’re not convinced that you’re carrying the right level of protection, you should get quotes and see how much changing your policy will cost. Celebrate paying off your loan and see if you can reduce your monthly expenses even more. Make sure you are saving the most you can by not overpaying for the coverage you need with our free comparison tool below! 

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