Paying off your car loan is a significant milestone. Not only do you get to say goodbye to monthly car payments, but you might also wonder if your car insurance costs will decrease. While your insurance rates won’t automatically drop, your coverage requirements will change, potentially leading to premium savings. In this article, we’ll explore how paying off your car loan affects your auto insurance and provide tips to help you save on your premiums.

What Coverage Do Auto Lenders Require?

When your car is leased or financed, lenders typically require you to carry collision and comprehensive insurance. This ensures their property—the vehicle—is protected until your lease or loan term ends.

Collision insurance covers damages to your vehicle caused by colliding with another car, striking an object or animal, or hitting a pothole. Comprehensive insurance covers damages not caused by collisions, such as theft, fire, vandalism, or natural disasters.

According to the National Association of Insurance Commissioners (NAIC), the average cost of collision insurance is $377.33, while comprehensive coverage costs an average of $179.84.

What Coverage Is Required for Cars Without Loans?

Whether your car is leased, financed, or owned outright, most states require drivers to have a minimum level of liability insurance. Liability insurance covers bodily injury and property damage to others in an accident you cause.

Minimum liability coverage requirements vary by state. For specific auto insurance coverage minimums in your state, check with your state insurance commissioner’s office or an insurance agent.

Full coverage car insurance includes liability, comprehensive, and collision insurance. On average, a liability-only policy costs $632.33 nationwide, while a full coverage policy costs $1,189.50, according to the NAIC.

How to Decide Whether to Decrease Auto Insurance on Your Car

Once your car is paid off, you might consider dropping comprehensive and collision coverage. Here are some factors to consider when making this decision:

How Much Is Your Vehicle Worth?

The maximum amount that comprehensive or collision insurance will pay out if your car is totaled is the resale value of your car (minus your deductible). If your car is only worth a few thousand dollars and you have a $1,000 deductible, the payout may not justify the cost of coverage.

A common rule of thumb is to drop collision and comprehensive coverage if your vehicle is worth less than 10 times the annual cost of both coverages combined. For example, if your annual premium for collision and comprehensive insurance is $550, and your car is worth less than $5,500, it may make sense to eliminate this coverage.

How Much Savings Do You Have?

Your car’s value isn’t the only consideration. Can you afford to repair your car if it were damaged or replace it if it were totaled?

If you have a substantial emergency fund and could cover these unexpected costs without financial hardship, you might want to drop comprehensive and collision coverage. You could even put the savings into a fund for your next car.

However, if paying for car repairs or buying a new car would strain your finances, the peace of mind that comprehensive and collision insurance provides may be worth the cost. Instead, look for other ways to lower your car insurance bill, such as bundling home and auto insurance or taking advantage of low-mileage discounts.

Do You Live in a High-Risk Area?

Your location can also impact your decision. If you live in a high-crime area, your vehicle could be at risk of theft. Similarly, if you live in an area prone to natural disasters or frequently drive on roads with lots of wildlife, maintaining collision and comprehensive coverage could be a wise choice.

The Bottom Line

Paying off your car loan can lead to changes in your auto insurance coverage requirements, potentially saving you money. However, it’s essential to weigh the pros and cons of dropping comprehensive and collision coverage based on your vehicle’s value, your financial situation, and your location.

For more personalized advice and to explore your mortgage options, contact O1ne Mortgage at 213-732-3074. Our team of experts is here to help you with all your mortgage needs.