When you buy a car, one of the biggest decisions is whether to finance it or pay for it outright. Most people choose to finance because of the high upfront cost. But paying your monthly car payment and car insurance coverage at the same time can be tough. This might make you wonder, "Will my car insurance go down once I pay off my car?" The answer is maybe. Here’s why.
How does a car loan affect my car insurance premiums?
Having a car loan usually means having higher premiums due to the extra coverage options you have. Here is an overview of the coverage options available for leased or financed vehicles:
GAP insurance
When you lease or finance a car, it's fairly common to get what's called GAP insurance. GAP stands for guaranteed asset protection or guaranteed auto protection. It’s designed to give extra financial protection to people who lease or finance their cars.
Basically, if your car is totalled or lost, GAP coverage steps in to cover the difference, or “gap,” between what you still owe on your loan and the car’s actual value. Any time you add additional coverage, your insurance costs go up, but once you've paid off your lease, you can cancel your gap insurance.
Comprehensive and collision coverage
Further, when you finance a car, your lender usually requires you to have certain types of insurance, like collision coverage and comprehensive coverage, to protect their investment. Having these coverages on your policy tends to make it pricier than the basic liability insurance that’s legally required in Canada. Once you've paid off your car loan, though, you could scale back on those coverages if you choose to.
So, can you expect your car insurance costs to drop when your car is paid off?
It all depends on what changes you make to your coverage. Dropping coverage like gap insurance, collision coverage or comprehensive coverage could save you hundreds of dollars a year. Here's what you need to know:
Coverage changes
As we mentioned, when you have a car loan, you’re usually required to carry full coverage —things like collision and comprehensive on top of your liability insurance—to protect the lender.
Once you’ve paid off your loan, though, you have the option to adjust your coverage. You might decide to drop comprehensive or collision insurance, as well as your GAP insurance since they’re no longer required. By removing certain coverage options from your car insurance policy, you're sure to see lower insurance premiums.
GAP insurance usually increases your premiums by approximately $350 to $800 for 3 to 5 years of coverage, which means this adds about $30 to $66 to your monthly auto insurance premium. Once you drop your gap insurance after you've paid off your car, you could start saving a few hundred dollars a year on your insurance, though the exact amount can vary depending on factors like your car’s value, loan amount, and your insurance provider.
As for collision and comprehensive coverage, having both can add $600 to $1,000 a year or more to your insurance premiums, depending on your vehicle and insurance provider.
But before making any changes, it’s important to think carefully about the risks. Reducing your coverage could leave you exposed if your car is damaged or totalled. You'll want to take into account the condition and value of your car, as well as whether you'd be able to cover repair or replacement costs out of pocket, before deciding. We'll explore this further in a bit.
Deductibles
Both collision and comprehensive insurance come with insurance deductibles. If you decide you want to keep your collision and comprehensive coverage, another way to still see some savings is by raising your deductibles for both.
While you have a car loan, you're usually required to keep a lower deductible to make sure you can cover any repair costs after an accident. But once the loan is paid off, you have the freedom to choose your own deductible. By opting for a higher deductible, you can lower your monthly premiums. Just keep in mind that this can be a bit of a trade-off—if you have an accident, you’ll need to pay more out of pocket.
How to decide whether to remove comprehensive or collision insurance
Now that your car is paid off, dropping your gap insurance is a no-brainer. But what about comprehensive and collision coverage? Is it the right move? Here are a few things to think about before deciding:
Your vehicle's worth
The most comprehensive collision insurance will pay out if your car is totalled its resale value minus your deductible. So, if your car is only worth a few thousand dollars and you have a $1,000 deductible, the payout you’d get might not justify the cost of keeping that coverage.
For example, if you’re paying $1,000 a year for collision and comprehensive coverage, and your car is worth less than $5,000, it might make sense to drop it, especially if your deductible is $1,000. But if your car is worth $30,000, holding onto that coverage is probably a smart move.
Whether you can afford to repair or replace it
It's not just your car’s value you need to think about when deciding whether to drop comprehensive and collision coverage. Ask yourself: could you afford to repair or even replace your car if it were damaged or totalled?
If your car is worth $5,000, then after paying the deductible, you'd receive $4,000 from your insurance company. If you’ve got a solid emergency fund and could handle those costs without too much stress, you might consider dropping the coverage.
However, if paying for repairs or buying a new $30,000 car would put you in a tough spot financially, the peace of mind that comes with collision and comprehensive coverage might be worth the annual cost.
Learn more about how your loan may affect your car insurance with BrokerLink
After paying off your car, dropping gap insurance, collision coverage, and comprehensive coverage could save you several hundred dollars a year. But if you like the peace of mind that comes with full coverage, there are still plenty of other ways to lower your premiums.
One easy option is to shop around and compare auto insurance rates—you might find a better deal with another company. And that's where BrokerLink comes in. Our licensed insurance advisors can shop around on your behalf and find you the best coverage for your needs at a competitive price. We can also offer expert advice to help you decide whether it's best to keep or drop your full coverage car insurance.
You can reach us by phone, email, or in person at any one of our locations throughout Canada. No matter how you choose to get in touch, a BrokerLink insurance advisor will be happy to assist you. We also encourage you to take advantage of our free online quote tool that can provide you with a competitive quote in minutes.
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