What happens when you pay off your car

what happens when you pay off your car

What happens when you pay off your car? After you make your final payment, you can walk away knowing that you own your vehicle outright. According to a nationwide survey by The Zebra, 63% of people agree that owning a car is necessary for easy living.

After all, car ownership gives drivers the freedom to clear up room in their budget to focus on other debt. But, with car ownership also comes some newfound responsibilities. Keep reading to learn what happens after paying off online loans that require a lien on your car. 

Strategies for Paying off a Car

Take a look at some strategies for paying off your car below. 

StrategyAuto LoansCar Title Loans
BudgetingCreate a budget to allocate funds for monthly paymentsCreate a budget to pay off the loan as quickly as possible
Extra PaymentsMake extra payments to the principal to reduce the interestMake extra payments to reduce the loan amount and fees
RefinancingConsider refinancing for a lower interest rate if credit improvesRefinancing is usually not recommended due to high rates
Loan TermChoose a shorter loan term to pay less interestAim to pay off within the initial term to avoid rollovers
Automate PaymentsSet up automatic payments to avoid late feesSet up reminders or automatic payments if possible
Early PayoffCheck for prepayment penalties before paying off earlyPay off as early as possible to avoid additional fees
Negotiate with LenderDiscuss hardship options if you face financial difficultiesNegotiate for an extension without additional fees if needed
Debt Snowball MethodUse this method if you have multiple debts, paying off the smallest firstNot applicable as it’s usually a single, short-term loan
Debt Avalanche MethodPay off the loan with the highest interest rate firstNot applicable as it’s usually a single, short-term loan
Consult Financial AdvisorSeek professional advice for long-term planningSeek advice on how to manage high-interest, short-term debt
Check for Tax BenefitsSome interest may be tax-deductible depending on the use of the vehicleNo tax benefits, so focus on quick repayment

What Should I Expect When I Pay Off My Car Loan Early?

You may wonder, “What happens after you pay off your car?” After repaying the balance on your car, you can expect a few things to happen. 

Debt-to-Income Ratio Will Improve

Your debt-to-income (DTI) ratio refers to how much money you bring in regularly compared to how much money you owe in debts. The average American spends 9.5% of their income on debt each month.2 But how much do you spend? 

Below are the steps on how you can calculate your debt-to-income ratio.

  1. Add up all your monthly debts: Sum the amounts you pay each month for obligations like installment loans, credit card payments, and any other debts you may have.
  2. Note your total monthly income: This includes your salary, any side income, and other sources of recurring income you may have.
  3. Calculate your DTI Ratio: Divide your total monthly debts by your total monthly income. Multiply the result by 100 to get your DTI ratio as a percentage.

When you pay off a car loan, there will be a positive shift in your debt-to-income ratio. As long as your incoming cash flow has stayed the same, you should see quite an improvement in your credit after successfully getting rid of secured loans

Credit Scores May Go Up

An impactful benefit of paying off your car loan is the credit score increase that should shortly follow. Check your credit report about a month or so after you make your last car payment. You should see that the debt associated with your credit file has gone down and that a loan has been removed from your profile. 

When your credit score and credit reports improve, you may enjoy perks like: 

  • Access to a wider variety of financial products and services. 
  • Higher loan amounts. 
  • Lower interest rates. 
  • More convenient payback terms. 

You can view your free credit score anytime you like from services like Credit Karma, your bank, or your credit card provider. 

Credit Limits May Increase

One of the best benefits of paying off auto loans is the potential for credit limit increases on financial products you may already have. For example, when your credit card issuer sees that you have significantly reduced the amount of debt you owe, they may reward you by raising your credit limit. That means you will have access to a larger amount of credit, allowing you to make larger or more frequent purchases. 

However, be careful not to abuse your credit limit increase by overspending or making irresponsible purchases. It is still important to try to keep your credit utilization at around 30%. 

What Should You Do After You Pay Off Your Car?

After you are finished paying off your car, consider the following. 

Store Your Title in a Safe Place

Your vehicle title is the official documentation stating that you are the owner of your vehicle. If you ever want to sell your car, you will need your vehicle title. 

Since your title is such an important indicator of the ownership you have over your vehicle, it is vital not to lose this record. If an unwanted party should gain access to your vehicle title, they may be able to sell or use the equity in your vehicle without your consent. 

To protect your asset, store your vehicle title in a safe and secure place. You may want to get a safe or safety deposit box at a bank to ensure its security. 

Consider Using Your Car To Make Money

Vehicle owners have the opportunity to make extra money using their cars! For instance, you can start driving for delivery services like Grubhub, Uber Eats, or DoorDash. Or, you can even wrap your car for money and get paid to drive

Decide What To Do With Future Car Loan Payment Funds

Now that you’ve paid off your vehicle, you may have a bit of free room in your budget. Use the money previously intended for your car payment for something useful. For example, you can start putting extra cash in a savings account or emergency fund. Or, you can use the funds to focus on other expenses and debts. 

What Does It Mean To Own a Car?

If you own a car, you can take advantage of benefits like saving money on car payments and using your vehicle however you like. 

No More Monthly Payments! 

When you own your car, you don’t have to worry about making a monthly payment on it anymore! While you will still need insurance coverage and will have to pay for that monthly, you will no longer have a remaining loan balance on the vehicle itself. 

Another benefit you may enjoy after paying your car loan is a decrease in your car insurance rates. Sometimes, insurance providers will lower rates for people who have paid off a vehicle or have reduced their debts in some significant way. 

Free To Utilize Equity

As you pay back your car, the car loan provider acts as a lien holder of the vehicle. Lien holders have partial ownership over a piece of property and have the right to repossession if the borrower fails to pay back their balance or breaks their contract terms. 

When you are free from a lien holder, you have the freedom to use your vehicle’s equity however you like. This includes the option to sell your vehicle if you know how much you can get for a car title

You Are Responsible for All Repairs and Maintenance

People paying off their vehicles sometimes have what is called warranty coverage. With a car warranty, certain types of maintenance are financially covered. Warranties usually expire while the car owner is paying off their vehicle or shortly after. 

Without warranty coverage, you will be financially responsible for all repairs and maintenance your vehicle needs, which include: 

  • Tires
  • Electrical
  • Bodywork
  • Paint or other cosmetics
  • Oil changes

When You Should Consider Paying an Auto Loan Off Early

Paying off car loans early can have a major impact on your overall financial health and well-being. If you are thinking about paying your car loan early, make sure the following apply to you. 

Payments Fit In With Your Budget

Check your monthly budget to see if you can afford to pay a bit more on your car loan payments. By paying extra each month, you can cut down the time it takes to pay off your car by months or even years! 

There Are No Prepayment Penalties Built Into Your Loan Contract

Before you start making extra payments or early payments, check your loan agreement to confirm there are no prepayment penalties. A prepayment penalty is a charge some lenders issue for borrowers who make their loan payments before the designated due date. Many expensive loan options, such as online payday loans, have prepayment penalties. 

You Don’t Have Any Other Pressing Financial Concerns

Before you start putting extra money towards your car payments, look at how much debt you owe in total. If you have any past-due bills, focus on those first. Or, if you have a long list of bills to take care of, consider spreading out your available income to cover more debts. 

But, if you don’t have many other financial obligations, it may be in your best interest to put some extra income towards your car payments. 

How To Save Money on Your Car Payment

Everyone wants to save money! Check out some tips below for saving money on your car payments. 

Negotiate Your Contract

Before signing your loan agreement, read it over thoroughly. Then, make your lender clarify anything that doesn’t make sense to you. This is also an excellent time to negotiate your loan details if you like. 

For example, say you were reading your loan agreement and saw your lender planned on charging you an extremely high interest rate. It may be worth it to ask for a reduced rate and see what your lender can do for you. By getting a lower rate, you can save hundreds of dollars or more over the course of your loan. 

Consider Refinancing

If you already have a car loan but are struggling to keep up with the payments, it may be wise to refinance. Refinancing with installment loans or personal loans may be a great way to get a lower rate or a better loan term. 

Tips for Paying off a Car Loan Early

Don’t wait to reap the benefits that can come from paying off your car loan! Check out the helpful tips below so you can learn how to pay off your car loan early. 

Pay More Than Your Minimum Amount Due

Pay off your loan faster by paying more than the minimum amount each month. This may also be a helpful solution if you want to pay off your loan faster but are dealing with a loan contract that includes prepayment penalties. You can also save a significant amount on interest payments by paying more each month. 

Make Extra Payments if You Can

If you have some extra cash lying around, consider putting it towards your car loan. Even if you don’t have enough money for a full payment, you can make partial payments to chip away at your balance even faster. 

Get Some Additional Income

If you have the time and the energy, consider getting a temporary part-time job to help out with your car payments. You can also get some additional income by having a garage sale and selling some unwanted items. 

FAQs About Paying Off Cars 

How soon will my credit score update after paying off auto loans?

A credit score may take two to six weeks to reflect the changes after a borrower has paid off auto loans. Credit bureaus usually update monthly, so keep an eye on your credit report to see the positive impact.

What happens to my car insurance after paying off the loan?

Once you’ve paid off your auto loan, you may see a change in your car insurance rates. Some insurance coverage that was mandatory while you were making monthly payments may become optional, potentially lowering your monthly car payment for insurance.

Do I need to notify anyone after paying off my auto loan?

In some title-holding states, you may need to notify the Department of Motor Vehicles (DMV) to update the car title to reflect that you’re now the sole owner. Your lender will usually handle this, but it’s good to double-check.

How do I get my car title after paying off the loan?

Once your loan balance is cleared, your lender will release the car title to you. The process can take two to six weeks, depending on your state’s regulations and the lender’s procedures.

Is there a benefit to paying off my loan early in terms of personal finance?

Paying off your loan early can free up your monthly budget and save you money on interest in the long run. However, make sure to check for any prepayment penalties in your loan agreement.

What should I do with the extra money from no longer having a monthly payment?

Now that you’re free from monthly car payments, consider reallocating that money to other areas of your personal finance, like building an emergency fund, paying down other debts, or investing for the future.

Will paying off my auto loan affect my auto insurance?

Paying off your auto loan may allow you to adjust your insurance coverage, as some types of coverage are only required by lenders. Check with your auto insurance provider to see if you can optimize your policy.

How does paying off your car affect your credit mix?

Paying off your car loan will change your credit mix, which is one of the factors credit bureaus consider when calculating your credit score. While having a variety of credit types is generally beneficial, the impact on your score may vary depending on your overall financial situation.

What should I tell my insurance company after my car is paid off?

Once you’ve finished paying off your car, it’s a good idea to notify your insurance company. You may be able to adjust your coverage options, which could potentially lower your insurance costs. Always consult with your insurance company to tailor your policy to your now car-free status.

Is the process for receiving my car title different in a title-holding state?

In a title-holding state, the lender holds onto the car title until the loan is paid off. Once you’ve cleared your loan balance, the lender will initiate the process to transfer the title to you. The time it takes can vary, so it’s best to check both state regulations and with your lender for specific timelines.

CreditNinja – The Bottom Line on What Happens After You Pay Off Your Car

At CreditNinja, we understand that deciding to pay off your car loan early is a significant financial milestone. Whether you’re looking to improve your credit score, adjust your insurance coverage, or simply enjoy the freedom of owning your car outright, we’re here to guide you every step of the way. 

Our online blog has information on all sorts of financial topics. Learn how to check for liens on a car, the difference between a soft and hard credit check, and much more! 


  1. Car Ownership Statistics │ The Zebra
  2. The Average American Spends 9.5% of Their Income on Debt Each Month. How Do You Compare? │ NASDAQ
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