Car loans and the impact on insurance rates: what you need to know

Nearly every state has minimum requirements for auto insurance coverage. But the decision to buy other types of coverage — like collision and comprehensive — may be left up to you. However, if you have a car loan, your lender will very likely require you to carry both collision and comprehensive coverage on your policy.

But when you pay off your loan, you have options that can reduce your rates, like reducing the amount of coverage or dropping collision and comprehensive altogether.

Not sure if you're getting the best rates? Visit Credible to compare auto insurance companies and shop plans.

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Can insurance rates drop if I pay off my car?

Many people think that once they pay off their auto loan, their insurance rates will drop. Generally, this is true. But until you pay off your loan, the title- or lienholder — usually a bank — will likely require standard collision coverage and quite possibly comprehensive also.

Once you own your car, you are free to either decrease the amount of this coverage or drop comprehensive and collision entirely — thus reducing your insurance rates. If your car has depreciated in value, it may also cost less to insure. Plus, you can also improve your driving record to lower your rates.

Whether you've paid off your car loan or still have one, you can explore pricing and find the right auto insurance plan that fits your needs on Credible.

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How do collision and comprehensive coverage affect my rates?

Comprehensive and collision coverage are separate, optional coverages that let you make a claim for damage or total loss to your vehicle, even if you’re not to blame.

Collision coverage protects your vehicle if:

• You hit another vehicle
• Another vehicle hits your car
• You unintentionally roll, flip or overturn your vehicle
• You hit a stationary object, like a tree

Comprehensive coverage protects your vehicle from:

• Theft and vandalism
• Glass breakage
• Damage from a propelled object, like a falling boulder
• Hitting an animal
• Fire and floods
• Damage due to natural events, like a tornado

Nearly every state requires certain levels of car insurance, except New Hampshire and Virginia. In New Hampshire, you are not required to purchase car insurance but you are financially obligated to compensate anyone who is injured as a result of your driving. In Virginia, you have the choice to maintain car insurance or assume the risk of driving without insurance and pay a $500 uninsured motor vehicle (UMV) fee.

But because collision and comprehensive coverages are optional, if you choose to add them to your policy, or your insurance carrier requires this coverage as long as you're paying on your loan, your insurance rates will be affected.

How can I lower my auto insurance rates?

Besides lowering your coverage or dropping collision and comprehensive entirely, you can also lower your auto insurance rates in other ways. 

1. Shop around. A marketplace like Credible offers a way to explore insurance rates and plans all in one place.
2. Pay a higher deductible. You’ll pay more upfront if you are involved in an accident but your insurance rates will be lower overall if you choose to pay a higher deductible.
3. Bundle insurance policies. If you have a homeowners policy with a company, ask to bundle your car insurance. Most insurance companies will give you a break on your total insurance costs. This works too if you own more than one vehicle or are a longtime customer.
4. Earn mileage discounts. You may get a discount if you drive less than the standard number of miles each year.
5. Maintain or improve your credit. Some insurers will reduce your insurance costs if you maintain a good credit score or work to improve your credit.
6. Maintain a clean driving record. Most insurance companies will offer discounts to people with clean driving records.
7. Check out other discounts. There are many other ways to reduce your insurance costs, including maintaining high grades in school, taking a defensive driving class and adding security and anti-theft equipment to your vehicle.

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Choosing new car insurance? Here are 6 types of coverage policies

If you’re choosing new car insurance, changing insurance or looking for a new insurance company, there are 6 types of coverage you’ll want to explore. Depending on your state-required minimums, some coverages are required. But all are meant to safeguard you against financial loss if an accident happens. 

1. Liability coverage. Liability coverage is mandatory in most states. It pays for damages to another vehicle, another structure or injuries to a person if you are at fault.
2. Collision coverage. Collision coverage covers damage to your vehicle if you’re in an accident. It does not cover a vehicle or an object you may have hit.
3. Comprehensive coverage. This coverage covers damages to your vehicle not caused by a collision but from damage caused by weather-related occurrences, like hail or a tornado.
4. Medical payments coverage. If you’re in an accident, this coverage helps pay for medical expenses incurred by you or a passenger.
5. Personal injury protection (PIP). Similar to medical payment insurance, PIP insurance helps pay for medical expenses or lost wages. This coverage is only available in certain states.
6. Uninsured and underinsured motorist coverage. These coverages help pay for damage to your vehicle or medical expenses you incur if you are in an accident and the other driver is not insured or underinsured.
7. Gap insurance. Gap coverage is an optional coverage that pays the difference to replace your totaled or stolen vehicle.

Think you may be overpaying for car insurance? You can check online through Credible’s partners.

Final thoughts

If you’ve recently paid off your auto loan, you may be able to reduce your rates by reducing or dropping collision and comprehensive coverage. There are other ways to reduce your rates — by bundling your insurance policies, maintaining a clean driving record, upping your deductible and more. Get a better rate by visiting Credible and comparing plans from multiple insurance companies in one place.

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Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at moneyexpert@credible.com and your question might be answered by Credible in our Money Expert column.