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What happens when you pay off your car?

I have about a year left of payments until my car loan is paid off, but I’ve been thinking about paying it off early. It’s the first car loan I’ve had, and I’m curious: what happens once I pay off my car loan?

avatar
Kathryn Kurlychek · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
Once you pay off your car loan, you own the vehicle outright, and the
lienholder
can be removed from the vehicle’s title:
  • In title-holding states: The lender will hold onto your vehicle’s title until the loan has been repaid, then send you the free and clear title in the mail within a few weeks of your last payment.
  • In non-title-holding states: You will have to contact the DMV to remove the lienholder. You’ll typically receive a lien release and formal documentation that the loan is paid in full from your lender, which you can then bring to the DMV to get your title.
Once you pay off your car loan, you can also drop your
comprehensive
and
collision coverage
, although it can be beneficial to keep them.
Regardless of whether or not you drop the full coverage, it may be the right time to shop around for new
car insurance
, as many insurance providers offer better rates to customers who own their vehicles.
A word of caution: Before you pay off your loan early, check whether or not your lender has included
prepayment penalties
into the loan. Some lenders will actually charge you for paying your loan off early, rather than sticking to the loan’s original terms—which can negate the financial benefits. Check your loan contract or contact your lender to learn whether there are any penalties for your specific loan.
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