Paying off your car may affect your insurance coverage requirements. However, paying off your car does not directly affect your auto insurance rate.
The presence of a car loan, no matter how much you owe, doesn’t mean you’ll automatically pay a higher insurance rate, as listing a financial company as a payee on your policy won’t affect your rate. However, having a car loan will almost certainly mean that you’ll have to carry more insurance than your home state’s minimum requirements. Banks that back auto financing loans almost always stipulate that their customers carry more coverage than is required by law – such as additional liability insurance as well as comprehensive, collision, and/or lease/loan payoff coverage – to protect the bank’s interest in the car. Also, customers who finance vehicles are sometimes required to carry insurance policies that have lower deductibles, which makes their premium more expensive.
Once you have paid off your car loan, and you own the vehicle outright, the company that financed your car doesn’t have a say in what type of insurance coverage you must have any longer, and you can shop around for different options. Dropping certain types of coverage or lowering the limits on your policy could get you a lower premium.
So, paying off your car could allow you to pay less for insurance, but you won’t see it as an automatic rate decrease on your policy. If you have paid off your car and want to make changes to your coverage options, call your insurance provider as soon as possible.
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