Paying off a car loan is exciting, especially if you’ve been consistently chipping away at it for years. It finally feels like your hard work and dedication are paying off. But what comes next? How do you go from making payments to owning free and clear? Getting that title after a financed purchase is not always easy or obvious, but all the information you need is here.
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What happens when you pay off your car
While you’re making payments on your car, there’s a lien on it. Although you’re responsible for the car, you don’t technically own it yet. The lender owns the car and the lien ensures it will get its money if you try to sell it. With a lien in place, the title can’t be transferred.
After you’ve paid off the loan, the lien is lifted. The title is then released to you because you are now the owner.
What is a car title lien?
As soon as you sign the finance agreement, a lien is created. An auto lien shows the lender’s security interest in the vehicle. It gives it the right to take possession of the car in case of nonpayment. The lien remains associated with the car’s title until you’ve paid off the loan in full, which includes the purchase price of the vehicle plus interest.
How do you get your title after paying off my loan?
Your state’s laws dictate the procedure for getting the title to your car. Some states handle it completely for you, while others require you to put in some work.
Title holding vs. non-title holding states
Depending on where you live, purchasing a car can be a vastly different experience. In title-holding states, the lienholder holds the title until it’s paid off. Once the lien is satisfied, the title is released to the owner. The majority of states are title-holding states.
Nontitle-holding states send the vehicle title with the owner’s name and lienholder’s name directly to the vehicle owner to maintain until the loan is paid off. This means you’ll need to transfer that paperwork in order to make it official, so it pays to know which category your state falls under.
How long does it take to get your title after paying off the car loan?
According to Progressive, it’ll take two to six weeks to get the title after paying off an auto loan. The state’s specific procedure and the length of time it takes a lienholder to notify the Department of Motor Vehicles (DMV) impact the timeframe.
Your lienholder may decide to electronically notify your state of the change in ownership if you reside in a state that uses the electronic lien and title system. After receiving your final payment, the lienholder typically does this within two weeks.
The lienholder may send a paper notice of the change in ownership to the DMV in states where it isn’t electronically reported, or it may send you the current title and a letter of release of lien. Find out from your local motor vehicle department whether it will send you the new title or whether you need to file paperwork to get it yourself. You will need to take the title and a release of lien letter to your local DMV and complete the necessary paperwork in order to obtain a new title reflecting the change in ownership. This process can take several weeks.
What to know about paying off your car loan
Paying off your car loan and becoming the owner means some changes. Although paying off the loan is a good thing, you’ll want to take some steps to make the most of these changes.
Notify your car insurance company
In order to remove the lienholder from your policy, let your auto insurance provider know you paid off the loan. If you continue to carry comprehensive and collision coverage and your car is totaled in an accident, the insurance company will pay you directly rather than the leinholder/lender. (Even if you neglected to do so and your car was totaled, the lender would still send you the money.)
Keep an eye on your credit score
Paying off your auto loan can initially lower your credit score because the account is closed once paid. Losing an aged account with a good payment history can cause your score to drop a little. As long as you make payments for your other lines of credit and accounts on time, your scores may rise.
Use the excess funds wisely
Paying off your auto loan frees up some cash each month, but you’ll want to ensure you make good use of the funds. Consider saving the money, investing it, or using it to pay other debt. Tackle the debt with the highest interest rates first.
Yours free and clear
When you pay off your loan, you’re the legal owner and best of all, no longer need to make a car payment. The last step is getting the title to prove it’s yours, free and clear. It’s not hard to do, but the process does vary based on how the title is held (title-holding or nontitle-holding states).
What happens when you pay off your car insurance policy?
Paying off your car insurance policy means you’ll be covered for the entire duration of your policy term without having to make a monthly payment.
What happens when you pay your car off early?
Paying off your car early means you’ll remove the lien ahead of schedule, but it can sometimes result in a repayment fee. You’ll want to review your loan agreement for specific details.
How can you pay off your car loan faster?
You can pay off your car loan faster by making bi-weekly payments or refinancing the loan.