Does my insurance premium go down when I pay off my car?

Insurance Q&A: “Does my insurance premium go down when I pay off my car?”

With the U.S. economy in shambles and no end in sight, more and more consumers are paying off their cars and keeping them, rather than restarting leases or buying new cars.

Of course, the same poor economy is forcing many to look for ways to save money anywhere they can, including via cheaper car insurance.

This has led to an increase in inquiries relating to whether or not car insurance premiums go down when car loans are paid off. Every time you get a quote for auto insurance, insurance companies will ask if you have a loss payee or a lender. It’s easy to understand how people take this to mean higher rates.

If you’ve paid off your car, you are saving money. You’re no longer paying interest on a car loan. But your insurance rates don’t change if you keep the same coverage.

[Is car insurance higher on a leased car?]

What does change with insurance when you pay off your car?

Your insurance premium is not calculated on whether or not you owe money on your car in the first place. That said, there is no effect on your car insurance premium as a result of paying your car off on a base level.

As a quick reminder, physical damage coverage insurance premiums are calculated on the statistical chance you will cause an accident and how much the insurer would have to pay to repair or replace your car.

Paying off your car does not make you a safer driver, and does not change the cost to repair or replace your car in the event of a loss.

How can your insurance change? Simple. If you’re financing a car, your monthly payment is coupled with an agreement between you and the bank. They agree to give you money to pay your car now while you agree to carry collision and comprehensive insurance. Many people also carry gap insurance to cover the difference in payments if your car is a total loss while you’re underwater. After you pay your loan off, there’s no reason to carry gap coverage. You can also drop comprehensive coverages if you choose to. Many people do this with peace of mind when the total value of the car is particularly low.

Tip: Your insurer only promises to pay for repairs or to replace your vehicle at its actual cash value (depreciated value). Owing a few hundred dollars on your car or having it completely paid off does not change the value of that make and model. Put a different way, a 2005 Honda Civic is worth $5,000 whether you paid it off in 2010 or just bought it yesterday.

Should you drop optional coverages with your auto insurance company?

Now that your car is paid off; you might be able to save some insurance money…but not without giving up certain coverage, which may not be the best idea for you. Say what?

Well, as discussed in our New Car Insurance post, you are required to purchase physical damage coverage (comprehensive and collision) when you finance or lease a new car.

[What is the difference between comprehensive and collision coverage?]

Basically, the lender is forcing you to pay for coverage to repair the vehicle THEY STILL OWN until it’s paid off.

All bets are off once the car is paid off. At that point, any damage you cause to your vehicle is 100% your problem.

If you are in a position where you would simply buy a new car or pay to repair your car out of your own pocket, you can drop the physical damage coverage from your policy and save some serious dollars. Many people aren’t in that position, though. While the savings in your auto insurance policies may be tempting, it won’t necessarily balance out the way you think when you’re trying to file an insurance claim with your insurance policy. (For more information, read our “What To Do If Your Car Insurance Will Not Pay For a Claim“).

Just don’t call your insurer when your car is destroyed by hail or your run into a light pole, you’ll be on your own. If your car is hit by another at fault driver, you would have to hope their insurance would take care of you.

Read More: Will my premium go up if I file an insurance claim?

[Should I drop collision coverage on an older car?]

How can you find the right insurance with or without an auto loan?

If you’re excited about paying off your car and bothering to see if it lowers your insurance premium, you’re probably not Paris Hilton and can’t afford to pay out of pocket for damages you cause to your own car.

It is recommended you only drop the physical damage portion of your coverage if your vehicle isn’t worth much. In other words, if you won’t get a significant amount in the event of a total loss, it doesn’t make sense to pay for more coverage without a lien holder. If you can, it makes sense to carry the additional coverages.

You can read more about when to forego physical damage coverage in the New Car Insurance post referenced above.

Read more: How to lower your auto insurance costs.