It's a huge milestone to finally pay off that car loan. Unfortunately, owning your vehicle free and clear doesn't automatically reduce your car insurance rates. However, there are a few things that come along with car ownership that could allow you to pay less for insurance and steps you can take to reduce your rates.
Although paying off a car loan doesn't reduce your rates, it may change your insurance coverage requirements. When a bank holds the title to your car through a loan or a lease, it usually requires a certain standard of collision coverage and possibly comprehensive coverage as well. Once you own the car, you're free to decrease or drop your collision and comprehensive coverage. Collision coverage reimburses you for damage to your vehicle caused by collisions, while comprehensive covers you for damage that's not crash-related, as well as theft. Lowering or dropping these coverages might make sense if your car isn't worth much. However, good coverage can be a lifesaver if your car is expensive to fix.
It might seem like your insurance rates just got cheaper after you finally paid off your loan. However, that may be a factor of your car's value, not your loan status. Vehicles tend to dramatically decrease in value after the first couple years of their life. Insurance companies will charge less to insure a car with a lower value. A lower value means the insurer won't have to pay out as much if it needs to compensate you for your car.
Paying off your car might coincide with rate reductions related to age. The common myth that your insurance rate drops at 25 just isn't true. However, insurance companies will reduce your rates as you get into your 20s and 30s. They'll also decrease your rates as you gain more years of driving experience.
There are a plethora of factors that affect your car insurance rates. Some factors are outside of your control, but you can take certain steps to reduce your rates. You can't do anything to change your age, gender, location or past driving history. However, you can switch to an older, safer or less-expensive vehicles to reduce your insurance cost. Some companies offer discounts if you pay up front and have a good driving record. You can get a discount in some states based on your credit history, and purchasing multiple policies with the same insurer could get you a reduction.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.