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.
Get a final payoff amount and stop making payments
When you’re ready to make the last payment on a loan, contact your lender to get the exact final payoff amount as it may be different than the payments you have been making. 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 the final payment, you’re done! The loan is paid off and you can stop making payments. Just remember to can cancel any automatic monthly payments that you’ve set up. And, no matter the type of loan, make sure you acquire proof that it has been fully paid off. Most lenders will send you a notice that the loan has been paid in full, or you can request this as well.
You’ll own an asset
If you paid off an auto loan or a home loan, congrats! This means you now own the asset free and clear.
For auto loans, according to a post for CarsDirect by Bethany Hickey, 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. This simply states that the lender no longer has a “lien” or any ownership over the asset and it now belongs solely to you.
Once you’ve made your last home loan payment, personal finance expert Amy Fontinelle notes in an article for Forbes that you should contact your local county recorder or clerk and request a certificate of satisfaction for your records. This officially documents that you’ve paid off the mortgage.
You can focus on paying off other debts
After 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 newly paid off loan and applying it to these debts. That 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 can also give you an excellent opportunity to make progress on savings. If you don’t need to apply that extra money to paying off other debts, Susannah Snider, financial editor for U.S. News & World Report, recommends using it 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 that 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. Don’t be too alarmed. 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. If you’re wondering how to best use the extra money you have after paying off your loan, our financial planning experts can help. They can help review your budget and make recommendations based on your goals for the future.