First of all, congratulations! Paying off your car lien is such a huge accomplishment. It is an excellent milestone to own your car outright.
How was your insurance experience during this period before you paid off the car? Insurance must have been expensive, right? But, you gained some years of driving experience.
Insurance is always a little expensive in the first few years of car ownership, particularly if you finance your vehicle. It even gets more expensive if your age is below 25 years.
But, no situation is permanent. It gets better with time.
Let’s dig in to understand this issue better.
Does Car Insurance Reduce After I Pay Off Car Lien?
Owning your car, fully, does not guarantee a reduction in the insurance premium rate. However, it will allow you to control your coverage options.
After you pay off your car, you’ll likely see a drop on your car insurance premiums, sometimes dramatically. You’ve now got the financier off your back, and no one will demand a given level of insurance for the car. The premiums should reduce. However, it’s not automatic.
Other factors which can determine if your premiums drop or not are:
- Lienholder insurance requirements
- Car depreciation
- Ability to lower your limits
- Driving record
- Your age
Lienholder Insurance Requirements
If you finance your car, the financier holds a lien (legal claim) against your vehicle. The financier (or lienholder) is listed on your car’s title and insurance policy until it is paid off. This essentially means that you don’t fully own the car until you pay it off.
Knowing that you do not fully own the car, most insurance companies tend to charge higher for a financed car.
To protect their interest in the car, most financiers usually require that you provide, at a minimum, collision and comprehensive insurance for the vehicle. This is to cover the possibility of failing to pay off the lien amount.
But there is good news.
Once you pay off your lien amount, the lienholder will no longer have a say in your insurance coverage. This means, after you pay off the lien, you’ll have control over the type of coverage you want for your car and the premium amounts.
Additionally, if you want to drop your collision and comprehensive coverage, and keep liability coverage only, you can do so. You now own the car entirely, and you have the decisions on which coverage you want for your wholly-owned car. This will lower your car insurance rates.
Should I Tell My Insurance Company That The Car Is Paid Off?
Paying off the car loan will lower your coverage premiums. But, there is one more thing. You need to let your insurance company know that you paid off the car.
It is a smart move to notify your insurer of the car loan payoff. Why?
- First, you’ll remove the lienholder’s name from your policy
- Second, you will gain control over your insurance policy and premiums
This means that if you decide to maintain the comprehensive and collision coverages (or full coverage) and your car got in an accident, you will receive the claim payout and not the lienholder. Besides, even if you did not remove the lienholder and your car got in an accident, the financier will have to send the claim funds.
The Rapid Depreciation Factor
The car’s value tends to depreciate over time. Often, the car’s value drops more rapidly in its first few years. By the time you pay off the vehicle, it may have lost almost half its value.
The reduced value can potentially reduce your premium rates. Why?
Insurance premium rates for older cars tend to be lower. Older cars have lower value and will cost the insurance company less to pay off if damaged or stolen.
You need to check with your provider after paying off your car’s lien. If you’re lucky, your car may have reduced in value, and your insurance premiums will reduce the next calculation.
Lowering Your Limits
The law mandates that every driver should have basic personal car insurance. However, these requirements often vary from state to state. The pricing of car insurance coverage is placed individually (a la carte) – per product. This is to enable you to customize premium amounts to suit your budget and exact needs.
You do not have to reduce your insurance premium rates by completely dropping your optional coverages, such as collision and comprehensive coverages. The next alternative is to lower the limits on your policy.
Often, financiers require high insurance limits because they want their car to have full protection in the event of damage or an accident. Besides, they are not the ones paying the premiums.
However, once you fully own the car, you can adjust your policy
limits lower. But, it would help if you considered that this might increase your financial burden.
Usually, your insurance deductible will vary based on your policy type. But, the premiums you pay as deductibles depend on your premium rates. In addition, if you decide to pay more in deductible, your premium rates may reduce.
The premium-deductible relationship is often inverse. This means that when one is high, the other is low, and vice versa.
The deductibles represent your demonstration of financial responsibility and capability when the need arises for you to file a claim. So, if you raise your deductible, you will lower the amount of payout your insurance company will pay you in the event of an accident or damage to your car. But, if you keep your deductible lower your future claims payouts may cost the insurance company more.
Your Driving Record
Your car insurance premiums might reduce after you own the car outright. But, if you have had a poor driving record in that period, your rates could remain higher.
Generally, providers raise rates after a driver is involved in a collision, sometimes regardless of fault. This can stay on your record for three years or more after the incident.
Furthermore, if the case is a DUI, the rates could skyrocket, or the insurer may even entirely drop your coverage. This can affect your other coverages.
Age is a crucial determinant when it comes to car premium rates. Newbie drivers, usually under the age of 25, are high-risk and have higher premium rates. However, there are steep savings in premium rates when one goes past the 25-year mark.
You will be lucky if paying off your car coincides with this rate reduction age. Insurers also decrease rates when one gains more driving experience because experienced drives are considered less risky and less prone to accidents.
Owning a car outright is an outstanding achievement. Besides, paying off your car lien amount may make your car insurance go down. But it is not automatic. There are other factors to consider. The lienholder’s requirements, your age, driving experience insurance deductible, car value, and insurance premiums limits all determine your premiums.
It would help if you talked to your insurance agent or insurance company to guide you by saving on your insurance premiums. Your insurance should not be your liability.