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Congrats—you've finally paid off your car. Now what? After you've paid off your car loan, there are a few actions you should take, including checking for insurance savings, checking your credit scores and putting your savings toward a new goal.
Check Your Credit Report
It may seem counterintuitive, but credit scores can sometimes decrease when you pay off a loan. Checking your credit reports will give you an idea of what's going on with your scores, and will also give you the chance to make sure all your car loan information is accurate.
If your credit scores went down as a result of paying off the loan, it may have happened for a couple reasons:
- It was your only account with a low balance. If all of your other credit accounts carry high balances, paying off your car loan could negatively impact your scores.
- It was your only installment account. Credit mix is a factor in your credit scores, and if you paid off your only installment loan when you paid off your car, this could cause your scores to drop.
There are many other reasons (unrelated to paying off your car) your score could have gone down, and checking your credit reports should help you understand why. You can get a free credit report from Experian to see what's in your file.
Get Your Car Title
You just paid off your car and own it outright—now get the paperwork that says so. Your car title is a piece of paper that lists the official owner and any lien holders on your car. Depending on what state you live in, you may already have a title with your name on it. If you do, you live in what's called a non-title-holding state, which means that your state's Department of Motor Vehicles issues the title to the vehicle owner and not the lien holder. In this scenario the lien holder is listed on the title, but is not the primary name.
If you live in one of these states and just finished paying your car loan, you'll want to remove the lien holder from your title. This can be done by contacting your state's DMV.
If you live in a title-holding state, that means that the lien holder—the lender that financed your loan—will hold the title and it will only be released when the lien has been fully satisfied. Once you've paid off your loan, your lien should be satisfied and the lien holder should send you the title or a release document in a reasonable amount of time.
Once you receive either of these documents, follow your state's protocol for transferring the title to your name. This will allow you to show ownership and sell the car in the future, so get all this paperwork in order as soon as possible.
Look Into Different Insurance Coverage Options
One advantage of paying off your car loan is that you may be able to get a better rate on your car insurance. First, notify your insurance company that you've paid off the loan so they can remove the other lien holder (lender) from your policy.
Lenders often require that you carry a minimum level of insurance so that if any damage were to occur, their collateral and investment (the car) would be sufficiently protected. Once your car is paid in full, there are no longer lien holders and you may be able to contact your insurance company to see if it can reduce your coverage or offer you a better rate.
Consider Saving the Extra Funds
Another benefit of paying off your loan is that now you can use the money you put toward your car payment for other things. This is a great opportunity to save or invest, as you've already proven you can function without the extra cash.
Of course, how you use this money will depend on your financial situation: You may have other debt you want to pay off or need to use the extra money for other necessities. If you can afford to save this money each month, however, you could use it to build up general savings, put more toward your 401(k) retirement plan, add the extra funds to your child's college savings plan, pay more principal on your mortgage each month or set aside the extra funds for a vacation.
You might also consider investing the extra money in securities, such as stocks and bonds, that may offer higher yields than a savings account over time. You could invest in a Roth IRA or a traditional IRA if you want to increase your retirement savings; work with a financial advisor or "robo-advisor" (digital financial advisor); or purchase your own stocks, bonds or mutual funds through a brokerage account. See "How to Start Investing" for more information.
No matter whether you begin to save, invest or utilize the extra money for something else, you can have peace of mind that you successfully paid off your loan and are now the sole owner of your vehicle.