Does Your Car Insurance Go Down After You Own the Car?

by John Csiszar, Demand Media
    Insuring your car can be a major part of your overall car expense.

    Insuring your car can be a major part of your overall car expense.

    The first few years of car ownership are generally the most expensive in terms of insurance. This is particularly true if you finance your vehicle, as most Americans do. Once you have paid off your car loan, your insurance premiums are likely to drop, in some cases dramatically. At the very least, you will have more control over how much your insurance costs after you pay off your loan.

    Lienholder Insurance Requirements

    Whenever you pay for a car over time, the finance company you make payments to holds a lien against your car. Essentially, this means you don't own your car until you pay off your loan. To protect the financial interest it has in the car, a finance company will usually require you to provide a certain minimum level of comprehensive and collision insurance for the car. In many cases, you cannot even get car financing without providing this insurance. As a result, the insurance premiums for your new car can tend to run on the high side. Once you have paid off your loan, the lienholder no longer has any say in your insurance coverage. If you want to drop your comprehensive and collision coverage, keeping only your liability coverage, you are free to do so. This can result in lower car insurance rates.

    Depreciation

    Over time, the value of a car tends to depreciate. In most cases, the most rapid depreciation of a car's value is in the first few years. By the time you pay off your car loan, your car may have lost more than half its value. As a result, insurance premiums for older cars tend to be lower, since it would cost an insurance company less to pay off the value of your vehicle should it be stolen or damaged.

    Lowering Limits

    You don't have to drop your insurance coverage completely to lower your insurance rates. By simply lowering the limits on your policy, your insurance will drop as well. Finance companies tend to require high insurance limits since they don't have to pay for the coverage and want to be fully protected in the event of an accident. Once you own the car outright, you can adjust your limits lower if you think it would make more economic sense.

    Driving Record

    Although the price of insurance generally trends lower after you own a car, a poor driving record could still drive rates higher. Insurers generally raise rates after a collision, sometimes regardless of fault. Any type of serious moving violation will usually affect your rates for a full three years after the incident. In the case of a DUI, your rates could skyrocket or even cause your insurer to drop your coverage.

    About the Author

    After receiving a Bachelor of Arts in English from UCLA, John Csiszar earned a Certified Financial Planner designation and served 18 years as an investment adviser. Csiszar has served as a technical writer for various financial firms and has extensive experience writing for online publications.

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