Paying off a loan comes with a sense of relief and satisfaction. But what happens after you pass this milestone? You’ll have a few loose ends to wrap up — and some big advantages to pursue. Here are a few points to keep in mind once you’ve made that final payment:
You can stop making payments
Once you’re ready to make the last payment on a loan, it’s a good idea to contact your lender and find out the exact final payoff amount. That way, you don’t end up owing a few extra dollars or cents of interest when you think you’ve paid off the full amount. Once you’ve made this final payment, you’re done! No matter the type of loan, make sure you acquire proof it has been fully paid off. You’ll also want to cancel any automatic monthly payments you’ve set up.
You’ll own an asset
Have you paid off an auto loan or a home loan? This means you now own the asset free and clear! According to CarsDirect, in 41 “title-holding” states, you’ll receive the title to your car from the lender so you can transfer it to your own name. In the nine states where you’re given the title as soon as you buy a vehicle, you’ll receive a release of lien letter once you’ve paid off the loan.
Once you’ve made your last home loan payment, personal finance expert Amy Fontinelle notes in an article for Forbes you should contact your local county recorder or clerk and request a certificate of satisfaction for your records. This officially documents you’ve paid off the mortgage.
You can focus on paying off other debts
Now that you’ve paid off one loan, take a look at the rest of your finances. Do you owe money on other loans or have any credit card debt? Consider taking the money you spent each month on your just-completed loan and applying some or all of it to one or more of these debts. This way, you can continue to improve your financial health — and you’ll be able to look forward to another payoff accomplishment in the near future.
You can make savings a higher priority
Paying off a loan provides you with an excellent opportunity to make progress on savings. In an article for U.S. News & World Report, financial editor Susannah Snider recommends using your newfound extra money to bolster your emergency fund, increase contributions to your retirement account, or put away more for your child’s college savings. You could also save the money for a down payment on a house or car, a major home purchase, or that vacation you’ve always dreamed of.
Your credit score may not go up right away
You might expect your credit score to increase right away after paying off a loan, but this isn’t always the case. Motley Fool writer Maurie Backman warns for some loans, a payoff can actually decrease your credit score. Credit scores are derived from a complex mix of factors like average account age and credit mix, and the closure of a loan can affect these temporarily. However, your score should rebound quickly, and a paid-off loan will also improve your financial track record in the long term.
Whether it’s for your car, your mortgage, or your student loans, paying off a loan is a major accomplishment. It’s also a big financial opportunity, and knowing what to expect afterward will help you make the most of it.