Once you’ve made the last car payment on your auto loan, you can remove any existing liens on your vehicle’s title, utilize the equity in your vehicle, and you may even be able to enjoy having some extra room in your budget and see an improvement in your credit.
Keep reading to learn more about the significance of auto finance and how your car loan repayment can affect different aspects of your budget!
Immediate Changes in Monthly Finances
With one less bill to worry about, you may find some extra room in your monthly budget after paying off your car loan. You can do some financial planning and allocate that disposable income towards something else. For example, say you had a high credit card balance you were trying to pay off. Instead of just making your minimum monthly payment, you can use the extra money from your previous car loan to make higher payments to pay off the balance and get some financial relief faster.
Impact on Credit Score
After you pay off your car, getting a copy of your next upcoming credit report may be a good idea. Depending on your financial situation, you may see a slight dip in your credit score after you pay off your car, especially if your car loan was your only existing installment account.
However, over time, your credit history should reflect the fact that you’ve successfully paid off a debt, which will positively impact your overall credit rating. Having less debt should help your credit utilization improve and lower your overall amounts owed, which will also help with credit score improvement.
Changes in Insurance Requirements
Since lenders are lienholders and, therefore, have partial ownership of the vehicle while borrowers repay their car loans, they often require borrowers to have particular auto insurance coverage. These full coverage plans can be quite expensive and may include protections you don’t really need. After paying off your car loan, talking to your insurance company and reviewing your current insurance policy and other options would be smart. You will most likely be able to switch to a less expensive plan with coverage narrowed down to what you actually need.
Owning the Car Title
After paying off your car loan you’ll want to take the necessary steps to ensure any liens are removed from your car title and that you receive a physical copy of your title that shows you as the sole owner of the vehicle. If you live in a non-title-holding state, you should be able to work with your state’s Department of Motor Vehicles (DMV) to remove any existing liens on your car title.
A non-title-holding state is a state where both the borrower and the lien holder are listed on the car’s title. While the borrower is usually listed as the primary name on the title, the lien holder is also listed to show their partial ownership of the vehicle.
The other nine states are referred to as title-holding states, which means the auto lender (or whoever financed the borrower’s auto loan) holds on to the vehicle title while the borrower repays their loan. After the borrower repays their loan, they will receive a lien release document with instructions on how they can transfer their car title into their name.
Once you are listed as the official owner of your vehicle’s title, you can sell your car or utilize its equity with secured loans like title loans.
Future Financial Planning
After your car loan is paid off, you may find you have some extra room in your budget. Instead of frivolously spending that extra cash, put it to good use! Check out some different ways you can reallocate funds after you’ve paid off your car below:
- Set financial goals: Set aside your extra money now to reach your financial goals!
- Develop a financial strategy: Develop a comprehensive financial plan with a financial advisor who can give you tailored advice and a structured approach to any financial goals you may have.
- Start an emergency fund: Set aside money for unexpected expenses or financial emergencies.
- Open a savings account: Special high-yield savings accounts can help you earn interest while also keeping your money safe.
- Savings plans: Regularly contribute to a savings plan like a 401(k), IRA, or other retirement account.
- Diversify investments: Consider spreading investments across different asset classes, like a mutual fund, stock, or bond. Getting advice from a financial advisor would be helpful here, too.
- Charitable donations: Allocate a portion of income to donate to museums or charities. These donations may be tax deductible and may also provide you with a source of personal fulfillment and community support.
What Are The Pros of Paying Off Your Car Early?
A few financial benefits of early repayment on your auto loan include:
- Interest savings: Generally speaking, the faster you lower your overall balance, the less loan interest you’ll accrue.
- Less debt: Depending on your financial situation, paying off your auto loan may put you in a situation where you’re debt-free!
- Increase financial freedom: When you don’t have a car payment, you’ll be free to use the money you previously allotted for that debt for other endeavors. Use that extra money to pay off other debt, reach personal finance goals, invest, and more!
- Improvement in credit over time: Credit bureaus reward positive financial behavior like paying off debts, which means you may see your credit improve over time after you’ve paid off your car!
- Possible eligibility for less expensive insurance coverage: Check with your insurance company after you pay off your auto loan; there’s a good chance you may qualify for more affordable insurance coverage.
What Are The Cons of Paying Off Your Car Early?
Before you decide to pay off your car loan early, think about any potential penalties or cash flow issues you may run into. 36 states, plus Washington D.C., allow auto lenders to charge an early payoff penalty, also called a prepayment penalty, for loans with terms of 60 months or less.2 This penalty charge may be as little as 2%, but it’s still worth taking into consideration.
Furthermore, to pay off your car loan early, you will most likely have to allocate extra funds from your income/budget toward the total payoff amount. If you decide to take this route, just ensure you still have enough money to cover your bills and other monthly expenses to avoid putting yourself in a tough financial spot.
Consider Paying Off Your Car with CreditNinja!
Paying off your car loan can come with some awesome benefits, like less debt, affordable insurance rates, extra room in your budget, and more. If you are working towards paying off your auto loan, paying more than your minimum amount due may help you pay off your balance faster; just make sure you can afford to do so.
You may also consider using a CreditNinja personal loan to help pay off the rest of your car loan! We offer personal installment loans for people with all types of credit and other great benefits like:
- Flexible repayment terms
- Competitive interest rates
- Same-day funding*
- Highly rated customer service
Check out our easy application online and see how much money you could get approved for in just a few minutes.
FAQs On What Happens After Paying Off Your Car
What happens when you completely pay off your car?
When you have completely paid off your car, you are officially the sole owner of the vehicle. That means you can remove any liens and may utilize the vehicle’s equity. You may also be able to enjoy other benefits like extra room in your budget, an increase in your credit score, and potentially a decrease in your insurance rates.
Does credit go up after paying off your car?
Initially, consumers may see their credit drop a bit after making the final payment on their auto loans/motor vehicles. This drop may be because their car loan was their only installment account, so paying off the loan has disrupted their credit mix. Also, their credit score may improve once their credit report reflects that they have paid off debt.
Does car insurance go down after your car is paid off?
While your rates may not automatically go down after repaying auto loans, you may be able to switch to a less expensive insurance plan.
What happens if I pay an extra $100 a month on my car loan?
By paying more than the minimum amount due on your car loan, you can pay off your overall loan faster and potentially save money on interest rate charges.
References:
