What to Do Once You Pay Off Your Car

1. Get Your Car Title

Your car's title documents legal ownership and lists any lienholders (like your lender) who have a financial interest in your car. Once you've paid off your car loan, your car's title should reflect that you're the sole owner. Depending on how titles are handled in your state, your lender may transfer title to you at the end of your loan or be removed from your title as a lienholder.

• How do you get an updated title? Your state's department of motor vehicles (DMV) and your lender largely determine the process. In some cases, your lender automatically notifies the DMV that your loan is paid and the DMV sends you a new title. In other instances, you must obtain paperwork from your lender and submit it to the DMV, in person or electronically. Check the DMV website in your state and/or contact your lender for details on how to proceed.
• Why do you need a new title? Your title should reflect your vehicle's correct legal ownership. If you want to sell your car at any point, only having an old title that lists a lienholder could complicate the sale.
• How long does it take to get a new title? If your state handles title transfers electronically and your lender moves quickly, you could receive a new title in a few weeks. The more manual intervention (and U.S. mail) required, the longer the process is likely to take. The important thing is to make sure the wheels are in motion: Contact your lender if they haven't reached out with information about transferring title within a week or two of paying off your loan.

2. Check Your Credit Report

Paying off a car loan can bring changes to your credit reports and scores. Lenders may take weeks to report a loan payoff to credit reporting agencies, so give it a month or so, then check your credit reports and scores to confirm any updates and see where you stand.

Review Your Credit Report

Check your credit reports from all three credit reporting agencies at AnnualCreditReport.com. Make sure your lender has updated your account and that the information shown is accurate on all your credit reports. Your loan should appear as paid in full and in good standing with no late payments (if this was the case).

Although your account is now inactive, it may show up on your credit reports for up to 10 years. Late payments and delinquent accounts appear on your credit report for up to seven years.

Check Your Credit Score

While you're reviewing your credit, you may also want to check your credit score. You can check your FICO^® Score^☉ (and credit report) at any time for free with Experian. Although paying off a loan is good for your credit, you may see a dip in your credit score immediately after paying off your loan. Here are a few reasons this might happen.

• It was your only account with a low balance. The amounts you owe on your accounts, including installment loan balances, are factored into the "amounts owed" category of your FICO^® Score. Paying off your car loan removes the positive contribution the low loan balance was making. This could have an effect on your scores, especially if your other credit accounts have high balances relative to their limits or original loan balance.
• It was your only installment loan. Removing your only installment loan may impact your credit mix. Your score typically benefits from having a variety of credit types—both installment loans and revolving credit cards, for example. Fewer types of active credit accounts may result in a lower score.

Learn more: Will Paying Off a Loan Improve Credit?

3. Look Into Different Insurance Coverage Options

Once your loan is paid in full, you can remove your lender from your insurance policy. Additionally, you may want to review your coverages now that your lender's insurance requirements no longer apply.

Lenders may require minimum liability as well as collision and comprehensive coverages to protect against loss and damages to your vehicle while your loan is in force. Lowering your liability coverage and/or removing collision and comprehensive coverage will lower your rate, but first consider what makes sense for you financially. Although some car owners forgo collision and comprehensive coverages as their vehicles age (and the likelihood of recouping their full value seems less certain), you may still find this protection worthwhile.

This might be a good time to review your coverage needs from scratch. If you'd like help, contact your current insurance company or talk to an insurance agent. Once you have a clear idea of your policy needs, you can compare policies and rates by reaching out to multiple insurance companies or using an online insurance marketplace, like Experian's auto insurance comparison tool.

Learn more: How Much Car Insurance Do I Need?

4. Adjust Your Budget and Consider Saving the Extra Funds

Until now, you've made room in your budget for a car payment, month after month. Before you delete that line item and release those funds into general spending, think about how you might use your money to meet other financial goals instead. Here are a few ideas.

• Save toward new goals or your next car. Fast-fund a high-yield savings account by automatically depositing your former car payment into savings every month. Use this strategy to build an emergency fund, save toward individual goals or give yourself a head start on saving for your next car.
• Pay off high-interest debt. If you have credit card balances, student loans or other debt you'd like to eliminate, you now have the budget to pay it down.
• Start investing. Consider funding a tax-advantaged IRA to boost your retirement savings, or open a taxable brokerage account that gives you the freedom to contribute and withdraw money whenever you want.
• Fund an important project. Here's your opportunity to fund something of specific value, such as a needed home improvement, continuing career education or a health savings account.

The Bottom Line

Once your car title, credit file, insurance coverage and finances are buttoned up, you're ready to enjoy car ownership without car payments. Congratulations: You've earned it. What you decide to do with that newly freed-up cash is entirely up to you. Whether you choose to buy a new car or put the money toward something else, it's important to consider this budget adjustment carefully.