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Does My Insurance Premium Go Down When I Pay Off My Car?

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Joel Ohman
Founder, CFP®

UPDATED: Mar 13, 2020

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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.

There is an equal mix of good and bad news relating to this question. We’ll start with the bad news and end on a (potentially) higher note.

Oh, and remember to focus on the good news that you no longer have a monthly car payment!

[Is car insurance higher on a leased car?]

Bad News

The bad news is that 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.

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.

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.

The (Potentially) Good News

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.

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…

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

Final Word

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 as it sits.

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.

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