Once you’ve paid off your car loan, the lien holder should send you a release document or title or notify the state Department of Motor Vehicles (DMV) so you can get an updated title.

In this guide, we’ll talk about what happens when you pay off your car. Other than getting the title, there are several things you can do to make the most of your finances now that you no longer have to make the car loan payment.

4 Things To Do After Paying Off Your Car Loan

If you’re wondering what happens when you pay off your car, we’ve outlined the next steps below.

1. Obtain Your Car Title

The process and timeline of getting a car title depend on the state you live in. In most states, the lienholder will update the information with the state DMV, and you’ll receive the updated title automatically. In some states, the lender will send you a lien release document, which you can take to the DMV to get an updated title.

It can take two to six weeks to get the title once you pay off the car debt, depending on the process in your state. We recommend starting this process as soon as possible after you pay off the loan so you can get your title faster and work through any potential issues sooner.

2. Renegotiate Your Car Insurance

Many lenders require borrowers to carry robust coverage because they have a vested interest in the car while they have a lien against it. Other than liability insurance, you may also have collision coverage and comprehensive coverage.

Once you’ve made the last car payment, you have more freedom to determine the right coverage for your car. Review your insurance policy or talk to a representative at the insurance company to renegotiate the car insurance. You may prefer to pay a little more for more protection in case of an accident, or you may want to reduce your premium payments and give up certain items. For example, if having coverage for negative equity in case of an accident is important to you, you may want to opt for GAP insurance.

3. Check Your Credit Score

Sometimes, when you pay off your car, your credit scores may drop if it impacts your credit utilization ratio, credit mix, or length of accounts. We recommend checking your credit report to see where you stand and to ensure that all your information on file is accurate.

Your credit scores may drop if you don’t have any other installment loans (impacting the credit mix) or if you have other accounts with high loan balances. If you plan to buy a car in the future, you’ll need a good credit score for a car loan at a better rate.

“However, the great thing about paying off your car loan is you're free of a large monthly payment!” shares Teresa Dodson, a debt expert and the founder of Greenbacks Consulting. "After you’ve received your title, check with all three credit-reporting bureaus to ensure the payoff has been updated. Over time, this should help your credit score because you owe less debt,” she explains.

4. Save the Extra Funds

Once you’ve paid off your car loan, you can use the money you freed up for other things like paying off high-interest debt, investing, or retirement savings. This is a good opportunity to strengthen your financial standing. The best way to use the extra cash will depend on your financial situation.

If you have other debts, especially high-interest credit card debt, paying them down makes the most sense. If you have no other debts, you can save this money for planned future expenses, an emergency fund in a separate savings account, for your child’s education, or your retirement plan.

Why Pay Off Your Car Loan Early?

If you haven’t yet paid off your car loan but have the means to do so, it’s important to weigh the pros and cons of doing so. We also recommend using a car loan payoff calculator to see how extra payments or biweekly payments will impact your outstanding loan amount, payoff date, and potential savings.

Pros of Paying Off a Car Loan Early

  • You’ll be able to save money on interest charges when you shorten your loan term.
  • You’ll free up more money in your budget for other expenses or savings.
  • Your debt-to-income ratio (DTI) will improve, making it easier to qualify for better terms on loans and new credit cards.
  • You’ll receive the car title and will have full ownership.
  • You’ll have the freedom to choose the insurance coverage you want.
  • You won’t be at risk of an upside-down car loan.
  • It will be easier to trade in or sell your car.

Cons of Paying Off a Car Loan Early

  • If you pay off the loan before the end of the term, you may have to pay a prepayment penalty if your loan agreement specifies it.
  • Your credit score may temporarily drop.
  • If you have other debts with a higher interest rate, it may be better to focus on paying those down instead.

Once You Pay Off Your Car, Continue To Work Toward Financial Freedom 

Now that you’re aware of what happens when you pay off your car consider your future financial goals. Upgrading to a new car may seem like an attractive option, but if your vehicle is in good condition, it may make more sense to use that extra money to pay down other debts, save, or invest.

Once you’re the sole owner of your car, you’ll also need to adjust your budget to account for any repairs and maintenance you may need. If you reduce your insurance coverage, you may also need to set aside additional money for expenses in case of an accident.